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ELEMENTS 



POLITICAL ECONOMY. 



ARTHUR LATHAM PERRY, 

PEOFESSOR OF HISTORY AND POLITICAL ECONOMY IN WILLIAMS 
COLLEGE. 



V 



So 







<} 



Quid pro quo. 




FIE"CK EDITION, REVISED AND REWRITTEN. 



NEW YORK: 

CHARLES SCRIBNER AND COMPANT, 

654 Broadway. 

1869. 



HBisi 



Entered according to Act of Congress, in tbe year 1865, by 

Arthur L. Perrt,' 

la the Clerk's Office of the District Court of the United States for the Mstrict 

of Massachusetts. 

By TrauBfei 
«M 4 }9U8 



RIVERSIDE, CAMBRIDGE: 

STEREOTYPED AND PRINTED BT 

H. 0. HOUGHTON AND OOMPANT. 



*%i- 



To 

MY ONLY BROTHER, 
BAXTER J:DWARDS PERRY, Esq., 

OF BOSTON, 

WHOSE FAITHFULNESS TO HIS CLIENTS IS ONLY SURPASSED BY 

HIS KINDNESS 'OF. HEART, 

,IS y 
\ - . ■'i 

ffij&fB Etiftfon of ms aSoofe 

FRATERNALLY INSCRIBED 



TABLE OF CONTENTS. 



-♦- 



CHAPTER I. 

FAOB 
0» THB HlSTOHY OF THE SciENCB 1 



CHAPTER 11. 
On the Field of the Science ,36 

CHAPTER III. 
On Value .46 

' CHAPTER IV. 
On Exchanoe . ; 91 

CHAPTER V. 
On Production 105 

CHAPTER VI. 
On Labob . 119 

CHAPTER Vn. 
On Capital , . 151 



VI CONTENTS. 

CHAPTER VIII. 

PAGB 

On Land 167 

CHAPTER ix. 
On Cost of Production 186 

CHAPTER X. 
On Monet . . . . . . . . . . .205 

CHAPTER XI. 
On CuRRENcr in the United States ..... 297 

CHAPTER XII. 
On Credit 832 

CHAPTER XIII. 
On Foreign Trade 368 

CHAPTER XIV. 
On the Mercantile System 439 

CHAPTER XV. 
On American Tariffs . . . 451 

CHAPTER XVI. 
OV Taxation .472 



ANALYSIS OF CHAPTERS. 



CHAPTER I. 

ON THE HISTORY OF THE SCIENCE. 

PAGE 

A. Definition of the science ...... 1 

B. Its basis and mode of development . . . . . 1 

C. Its history 2 

a. Oriental traffic. Abraham . . . . .2 

b. Hints in Homer, Ezekiel, Nahum, Herodotus . . 3 

c. Greek opinions ........ 3 

(1) Xenophon's " Ways and Means," and " House- 
holder" 4 

(2) Plato's " Eepublic " 5 

(3) Aristotle's " Economics," " Politics," " Ethics " . 6 

(4) Three reasons why Greeks did not develop this 
science 7 

(5) Their practical rules were good ... 8 

d. Roman opinions ........ 9 

(1) Cicero's " De officiis " 9 

(2) Cato, and the Moralists 10 

(3) Two reasons for their views . . . . 10 

(4) Liberality of Roman laws of property . . .11 

e. Middle-age opinion. Religion and the Universities . 11 

f. The Bullion Theory, and its policy . . . .12 

g. The Mercantile System .15 

(1) Its origin . .15 

(2) How defended . ..... 16 

(3) The Balance of Trade . . . . . .17 

(4) Nations that adopted it 19 

h. Recoil from the Mercantile System . . . .20 



VIH 



ANALYSIS OF CHAPTERS. 



i. Outline of the labors of its opponents ... 21 

(1) English writers ....... 21 

(a.) Tiie pamphleteers 21 

(&.) John Locke 21 

(c.) David Hume 22 

(d.) Adam Smith 23 

(e.) Malthus, Ricardo, McCulIoch, Senior, Mill 25 
(/) The Bullion Report of 1810 ... 26 
(g.) Henry Dunning Macleod . . . .26 

(2) French writers 27 

(o.) Quesnay, The Physiocrats, Agricultural Sys- 
tem 27 

(b.) Condillac 28 

(c.) Say 29 

(d.) Bastiat 30 

(3) Italians. Genovesi . . . . . .31 

(4) Germans. Zoll-Verein, List, Stein, Rau . . 32 

(5) Americans. National interest in the subject . 33 
(a.) Secretaries of the Treasury . . . .33 

(6.) Congressmen . . ... . . 34 

(c.) A partial list of writers . . . .34 

(d.) Henry C. Carey . . . . . 35 



CHAPTER H. 

ON THE FIELD OF THE SCIENCE 

A. Political Economy as taught by Adam Smith 

B. It is not a part of Moral Science . 

a. Its basis expediency, and not duty 

b. It has points of contact with morals 
0. It is a political, i. e. a social science 

a. Men in isolation not amenable to it . 

b. God made men for society . 

c. God the author of economical laws 

d. Man in isolation weak, in society strong 

e. Provisional view of the gains of exchange 
D. Some leading definitions of the science . 

a. The word wealth useless as a scientific term 

b. First reason of slow progress in the science 

c. Condillac's or Whately's definition . 



36 
36 
37 
37 
38 
38 
39 
40 
40 
41 
41 
42 
43 
44 



ANALYSIS OF CHAPTERS. 



IX 



d. Value is a relative word 

e. Second reason of slow progress 



44 
45 



CHAPTER III. 



ON VALUE. 



A. 
B. 
C. 
D. 
E. 
F. 
G. 
H. 

I. 

J. 
K. 
L. 
M. 
N. 
O. 
P. 
Q. 



E. 



Value not a quality of one thing 

Origin of the word value ..... 

It implies a kind of comparison 

Two persons and two owners required to fix value 

An action of exchange required 

Value of the pencil in cents 

Exigencies of language ..... 

The value of anything always stated in terms of 

thing else ....... 

The motives to an exchange .... 

The simplest case of value ..... 

The ultimate definition of value 

Only six cases of value possible .... 

Ownership is always mutually transferred 
Value best studied through the term services 
Distinction between service and commodity 
Macleod's definition of value . . • • 

Definition given satisfactory, because 
a. It covers anomalous cases .... 

(1) Analysis of services exchanged . 
&. It expands the field of value to its true limits . 

c. It separates the notion of value from matter 

d. And from some obstinate illusions of language 

e. And discriminates utility from value . 

(1) Utility is free and ultimate 

(2) Value is mediate, and involves effort . 

(3) Utility is usually a common factor 

(4) And is eliminated from influence on value 
/. Mistakes from confounding utility with value . 
Value a different thing from price . 

a. Numerical illustrations 

b. Effect of improvements on value 
No perfect measure of value attainable 
Limitations of value in the two elements of efforts 



46 
46 
47 
48 
48 
49 
50 

51 
52 
54 
56 
56 
57 
57 
58 
59 

59 
61 
64 
66 
68 
71 
73 
73 
74 
75 
76 
77 
77 
78 
80 
81 



X ANALYSIS OF CHAPTERS. 

U. Limitations in the two elements of desires ... 83 

V. Equation of supply and demand . . ... .85 

W. Every rise or fall of demand tends to check itself . 86 

a. Through a consequent rise or fall of value , . .87 

6. Through action on supply ..... 88 

X. Three classes of services in the law of their value . . 88 

a. Those augmentable without increased difficulty . 90 

6. Those augmentable through increased difficulty . . 89 

c. Those not augmentable at all . . . . 89 

CHAPTER IV. 

ON EXCHANGE. 

A. Principles of human nature involved in exchange . . 91 

B. Society a hive of buyers and sellers . . . . 92 

C. God's will as indicated in diversity of natural gifts . . 93 

D. Association and individuality 94 

E. Interest the sole motive in exchange .... 94 

F. All exchange depends on diversity of relative advantage 95 
a. Illustration of the tailor and blacksmith , . 96 
6. The greater the diversity of relative advantage, the 

more profitable exchanges become . . .96 

G. Freedom, association, invention, essential to just diversity 97 
H. The right to free exchange a natural right . . 98 

I. Governments formerly interfered with it . . . 98 

a. And thereby destroyed natural gains ... 99 

b. And barred a natural progress 95 

J. But latterly have conceded it within home boundaries 100 

a. Illustration from Napoleon's policy . . . .100 
K. Opposed to free exchange are monopolies . . . 101 
a. Arbitrary prohibitions on the sale of home services . 102 
6. Arbitrary restrictions on the admission of foreign ser- 
vices , 102 

c. Patents and copyrights unobjectionable monopolies . 104 

CHAPTER V. 

ON PRODUCTION. 

A. Laws of Political Economy are cheering . . . 105 

B. Definitions of "Produce," "Producer," "Product" , 105 



ANALYSIS OF CHAPTERS. 



XI 



a. Similar meaning of the Latin producere 

b. Inadequate analysis of Adam Smith • 

C. The beneficent law underlying production . 

a. Illustration of the mill .... 

b. Illustration of the loom .... 

c. Illustration from agriculture 

d. Tendency towards a common right in inventions 

D. Effect on values of Nature's help in production 

a. Illustration of the gloves 

b. Motive to introduce machinery . 

c. Commodities decline in value relatively to labor 

E. A general glut of products impossible . 

a. Proofs of the proposition 

b. Dr. Chalmers' fallacy .... 

c. Each interested in the welfare of all . ' 

d. Law of partial gluts 

e. Production demands intellectual attainments 

F. Production increased by Division of Labor . 

a. Example of the pins .... 

b. Example of the watches .... 

c. Advantages of the division of labor 

(1) Improved dexterity .... 

(2) The saving of time . . . 

(3) The invention of tools 

(4) Less waste of material 

(5) More economical distribution of labor 

(6) A saving in the use of tools 

(7) The advantages of wholesale and retail 

d. Disadvantages of division of labor 

(1) Monotonous work becomes irksome 

(2) Tendency to dwarf the powers 

(3) Undue dependence of the workmen . 

e. Limitations to the division of labor 

(1) From the extent of the market . 

(2) From the nature of the employment 



105 
106 
106 
107 
107 
108 
109 
110 
111 
111 
111 
112 
112 
112 
113 
113 
113 
114 
114 
115 
115 
115 
115 
115 
116 
116 
116 
116 
117 
117 
117 
117 
117 
117 
118 



XII ANALYSIS OF CHAPTERS. 

CHArTER VI. 

ON LABOR. 

A. Physical labor consists in moving things . . . 119 

119 
120 
120 
120 
121 
121 
122 
122 



a. Some illustrations of this ..... 

B. Physical labor defined . . • . . 
a. Nature helps gratuitously in production 

C. Men have found helps in producing motion 

a. The domestic animals ..... 

b. The weight of water and force of wind 

c. Steam . . . . 

d. To apply these capital is needed .... 

e. Labor, power-agents, capital cooperate in material 
production 

D. The technical definition of labor ... 

E. Principles of the remuneration of labor 

a. Distinction between skilled and common labor 

b. A natural monopoly unobjectionable . 

c. Reward of skilled labor higher 

(1) From the scarcity of appropriate original gifts 

(2) From the lack of requisite industry 

(3) From the lack of suitable training 

F. The law of supply and demand the law of wages 

G. But this law as modified through supply by 

a. The agreeableness of the employments. . 

b. The easiness of learning them .... 

c. The constancy of work in them . . . 

d. The amount of trust involved .... 

e. The probability of success . . . . . 

f. Custom, prejudice, and fashion .... 

g. Legal restrictions and voluntary associations . 
H. Demand for labor how constituted 

a. By the presence of capital .... 

b. The more capital the stronger the demand 

c. Wages-fund a dividend 

d. Number of laborers a divisor .... 

e. The average rate of wages the quotient . 
I. Popular remedies for low wages ineffectual 

a. Government cannot act directly ... 
6. But may indirectly and beneficially . 



122 

122 
123 
124 
125 
125 
125 
125 
125 
126 

126 
127 
129 
129 
131 
132 
133 
134 
135 
135 
137 
137 
138 
138 
139 
140 



ANALYSIS OF CHAPTERS. sill 

c. Public opinion may be useful ..... 141 

d. The Malthus law of population 142 

(1) No natural antagonism between fecundity and 

food 143 

e. Strikes are futile . 143 

(1) Are false in theory ...... 144 

(2) Are pernicious in practice ..... 146 

(3) Illustrations of this . . . . . . 147 

(4) Workmen and capitalists are copartners . . 148 

f. Cooperation nothing new in principle . . . 149 

(1) Legislation has narrow limits in economy . .150 

(2) Should give equal rights to capital and labor . 150 

CHAPTER VII. 

ON CAPITAL. 

A. Relations of capital to labor and power-agents . . 151 

B. Definition of capital ....... 151 

a. Mr. Carey's definition faulty . . . . . 151 

h. Distinction between capital and other property . 152 

C. How capital arises 153 

a. Origin of tools . . . . . . . 153 

b. Progress in tool-making . . . . . . 154 

c. Capital brings gratuitous forces into play . . 155 

d. Value of products created by aid of capital tends to 

decline relatively to the value of those less aided 

thus ......... 155 

D. The remuneration of capital . . . . . 155 

a. Definition of profits ....... 155 

&. They spring from abstinence . . . . . 156 

c. And are as legitimate as wages 156 

d. Illustration from the flax-factory .... 156 

e. Illustration from ordinary loaning . . . .158 

f. The capitalist creates a beneficent fund . . 158 

g. Strength of the motives to abstinence depend 

(1) On liberty . . . . • . . . 159 

(2) On equality 159 

(3) On security . 159 

E. Relations of capitalists to laborers 159 

a. No antagonism between them .... 160 



ANALYSIS OF CHAPTERS. 



b. Dependence of capital on laborers . 

c. Dependence of laborers on capital 

d. The laborer interested in the increase of capital 

e. The capitalist not injured by high wages 

F. Mr. Carey's law of distribution . . 

a. Arithmetical illustration .... 

b. Profits the leavings of wages .... 

c. Tendency towards equality of condition among men 

G. Distinction between circulating and fixed capital . 
a. Changing proportions between those 

. b. Transformation of one into the other 



160 
161 
161 
161 
162 
163 
164 
164 
164 
165 
166 



CHAPTEK YIII. 



ON LAND. 

A. Best test of a generalization 

B. Questions of land have been vexed questions 

C. Means at hand of settling them .... 

D. First proposition ...... 

a. Ownership came in under work 

b. Lands originally valueless . • . . 

c. What is sold is not the inherent qualities of the soil 

d. Old lands always for sale .... 

e. Their proprietors cannot sell God's gifts . 

f. The United States give away lands 

g. The English companies in the 1 7th century 
h. The current proverb at the West . 

i. The value of lands like all other values . ■ 

E. Second proposition 

a. Proof of it ....... 

b. Gradual occupation of the earth in consequence 

c. Mr. Carey fails to break down this law 

d. His own law not inconsistent with this . 

F. Third proposition ....... 

a. Exemplification of the principle 

b. Produce rises as estimated in other commodities 

G. Fourth proposition 

a. Ricardo's law of Rent 

b. The truth in it . . . ... 

c. The errors in it . . 



167 
167 
168 
168 
169 
169 
170 
171 
171 
172 
172 
172 
173 
173 
174 
174 
175 
175 
176 
176 
176 
176 
177 
178 
178 



ANALYSIS OF CHAPTERS. XV 

d. The true doctrine of rent . . - • . 179 

H. Fifth proposition 179 

a. Fee-simple best, and reasons why . . . . 180 
h. Moderately small farms best, because 

.. (1) The motives to production are more universal 181 

(2) Better supervision is thus secured . . .182 

(3) The masses are better educated . . . 182 

(4) National strength is better maintained . .182 

c. Illustrations from France ..... 183 

d. Illustrations from England and Scotland . . .184 

e. Illustrations from Ireland 185 

CHAPTER IX. 

ON COST OP PRODUCTION. 

A. Is there such a thing as natural value ? . . . 186 

B. Foresight important in production 186 

C. Cost of production sometimes the element of effort 
a. Illustration from amputation .... 
6. Illustration from knife-making 

D. Cost of production in relation to improved processes 

E. Cost of production made up of two elements 
a. Cost of labor ....... 

6. Cost of capital ...... 

F. c. Cost of labor made up of three elements . 

(1) Efficiency of the labor .... 

(2) Rate of nominal wages .... 

(3) Cost of the wages-material 

d. Three purposes of this analysis 

(1) To show the many elements in commercial calcu 

lation 

(2) To explain the diversity in nominal wages . 

(3) To explain the division between wages and 

profits ........ 

e. Cost of capital made up of three elements 

(1) The rate per cent 

(2) The time of advance 

(3) .The risk of deterioration 

G. Higher cost of labor ends in lower profits 
H. A uniform rise or fall of wages does not affect value . 199 



187 
187 
187 
189 
190 
190 
190 
190 
190 
190 
190 
191 

191 
192 

194 
196 
196 

197 
197 
199 



XVI ANALYSIS OF CHAPTERS. 

I. An unequal rise or fall does affect it . . . .199 

J. The same, mutatis mutandis^ is true of profits . . 199 

~K. Machinery an important element in cost of production . 200 
L. Machinery not injurious to the wages of labor, because 

a. Labor is required to make, repair, and work it . . 201 

6. It cheapens products and thus widens the market . 202 

c. It cheapens products used by the laborers . . . 202 
M. Price of raw materials tends to approximate the price of 

finished products 202 

a. Illustration in cotton cloth 203 

b. Illustration in lace . . . ... . 204 

CHAPTER X. 

ON MONEY. 

A. Money can be understood . . . . . , 205 

B. Inconveniences of barter ...... 206 

C. Money an invention — convenience sake . . . 207 

D. Its sole characteristic, a generalized purchasing-power 207 
a. Value in a book, and value in money . . . 208 

E. Money economizes labor ...... 208 

F. Brings buyers and sellers together .... 209 

G. Generalizes a purchasing-power in point of time . . 209 
H. Makes it portable, divisible, and loanable . . . 209 

I. First proposition . . . . . . . .210 

a. Meaning of the word medium . . . . 210 

h. Illustration of the railroad ticket . . . .211 

c. Small ratio of money to property . . . . 212 

d. Hume's comparison 213 

e. Money a generalized capital 214 

/. The amount needed determined by its nature as a 

medium 215 

g. Rapidity of circulation in this connection . . 217 
J. Second proposition . . . . . . .218 

a. Explanation of the word measure . . . . 219 

h. Relations of denominations to the medium . . 220 

c. Liability to error . . . . . . . 222 

d. French system of weights and measures . . . 224 

e. This second function complicates the subject of money 225 
K. Third proposition 226 



ANALYSIS OF CHAPTERS. XVll 

a. Diflferent materials used as money .... 226 

b. Gold and silver are the best 226 

(1) On account of their steady value . . .227 
(a,) On account of the steady demand for them 229 
(6.) Their uniform cost of production . . 230 

(c.) Their quantity 231 

(d.) Their fluency 233 

(e.) Every rise or fall tends to check itself. . 236 

(/.) A more or less rapid circulation . . 237 

(2) Because they are self-regulating . . . 238 
(a.) Legal relations of gold to silver . . 239 

(6.) Subsidiary coins 240 

(c.) The matter of alloy . . . .242 

(d:) Monetary conference in Paris . . . 243 

(e.) Natural laws of distribution . . . 246 

(3) They are portable, divisible, and impressible . 249 
L. Fourth proposition 252 

a. Grounds of it 253 

6. Dutch illustrations 254 

c. English illustrations . 256 

d. American illustrations 259 

M. Fifth proposition ,262 

a. The element of credit in money .... 263 

h. Difficulties about credit 265 

c. John Law and his system 269 

d. The French assignats 272 

e. American Continental money . ... 275 

f. American legal-tenders 276 

g. American State bank money 277 

Ti. American national bank money .... 279 

i. History of the Bank of England .... 281 

j. Different spheres of money and credit . . . 288 

N. Sixth proposition 288 

a. Origin of usury fallacies 289 

6. Exposure of these fallacies . . . . . 291 

c. Inconsistencies of governments ..... 295 

d. Action of England 296 

e. Action of Massachusetts and Rhode Island . . 296 
/ Retraction of Adam Smith ..... 296 

h 



XVlll 



ANALYSIS OF CHAPTERS. 



CHAPTER XL 

ON CURKENCY IN THE UNITED STATES 

A. Great variety in our forms of money 

B. Colonial currencies 

C. The depreciation of Colonial bills . 

D. Massachusetts redeems her bills . 

E. Parliament forbids their issue to the Colonies 

F. The Revolutionary paper .... 

G. Alexander Hamilton and English finance 
H. Mr. Morris' Bank of North America . 

I. The " pine-tree " coinage of Massachusetts . 

J. Hamilton's Report as Secretary of the Treasury 

K. A national bank then needful . . . 

L. Its constitutionality denied ... 

M. Charter of the first United States Bank 

N. Practical operation of it . 

O. Multiplication of State banks 

P. Second bank of the United States 

Q. Jackson's opposition to it . 

R. The "Specie Circular" .... 

S. The sub-treasury system .... 
T. The increase and character of the State banks 
U. The Continental coppers .... 
V. The decimal system of Federal money 

W. The dollar-unit 

X. The mint of the United States . 
a. Under-valuation of gold . 
6. Over-valuation of gold . 

c. The changes of 1837 

d. The changes of 1853 . 

e. The copper coinage . 
X. The national bank system of 1863 

a. Its patriotic origin . . 

h. Method of organization under it 

c. Its benefits .... 

d. Its dangers .... 
c. The true view of money as distinct from credit 



297 
298 
298 
299 
299 
299 
301 
302 
304 
305 
306 
306 
307 
508 
309 
310 
311 
312 
313 
314 
314 
315 
316 
317 
318 
319 
320 
321 
322 
322 
323 
324 
325 
327 
330 



ANALYSIS OF CHAPTERS. 



XLK 



CHAPTER XII. 



ON CREDIT. 



A. The peculiarity of credit 

B. The terms debt and credit 

C. The terms loan and borrow .... 

D. Definition of credits and debts .... 

E. Vast amount of transactions in them . 

F. Thfi instruments of credit are 
a. Promises to pay . . . . . 
h. Orders to pay 

c. Promises to pay are 

(1) Book-accounts 

(2) Promissory notes of individuals and nations 

(3) Bank bills 

(4.) Bank deposits . . . 

d. Orders to pay are 

(1) Bills of exchange 

(^) Checks or drafts 

Gr. The advantages of credit 

a. It passes capital from less to more productive hands 
6. It economizes the general operations of exchange 
c. It dispenses with the use of masses of coin 

(1) But never can dispense with coin altogether 

(2) Deposits different from bank notes . 
H. The disadvantages of credit .... 

a. It sometimes makes capital unavailable . 
6. It leads to commercial crises 

(1) Cause and course of a crisis . 
I. A national debt a sort of mortgage 

a. It has incidental advantages .... 
h. But greater burdens ..... 

c. Each generation should bear its own burden . 

d. The unfunded debt should be cancelled 

e. The funded debt paid in gold . . . 



332 
332 
332 
333 
334 

335 
335 

335 
336 
338 
339 

342 

348 
349 
350 
352 
353 
354 
355 
356 
356 
357 
358 
361 
361 
362 
363 
363 
365 



XX 



ANALYSIS OF CHAPTERS. 



CHAPTER Xin. 



ON FOREIGN TRADE. 

A. No new principles in foreign trade 

B. But a separate treatment needful . 

C. Diversity of relative advantage .... 

D. Grounds of national diversity 

E. When international exchange is profitable 
a. French silks and English cottons 

r. Desires, efforts, estimations, as before 
G. Unequal absolute cost illustrated . 
H. Equal absolute cost illustrated .... 
I. Limits of value in foreign trade 
J. Equation of international demand 

a. Arithmetical illustrations .... 

b. Same principle in gold, or other articles 
K. Purchase by exports is cheap purchase . 

L. Folly of attempting to " compete " in everything 
M. Effect on trade of improved processes . 
a. The benefit will be shared by both nations 
6. Sometimes more by the second nation 
N. Cost of carriage 

a. It increases cost of production . 

b. Each nation does not necessarily pay its own . 
O. International trade should be free . 

a. The mercantile system restricted it 

b. The protective system restricts it 

P. Origin of the word tariff 

Q. Nature of the thing tariff .... 
R. Distinction between revenue and protective tariffs 

a. A distinct principle underlies them . 

b. The two ideas cannot be united 

c. Illustration from the Cobden treaty . 
S. Objections to free trade answered 

a. It is not a theory . . . . . 

b. It will not depress wages .... 

c. "Why protection has been advocated . 

d. Manufactures would not collapse under freedom 

e. Nor would diversity suffer ... 

y. No difference between commerce and trade . 



368 
. 368 

369 
. 371 

371 
. 372 

373 
. 374 

375 
. 376 

378 
. 378 

380 
. 380 

381 
. 382 

383 
. 383 

384 
. 384 

385 
. 387 

387 
. 388 

388 
. 389 

390 
. 390 

391 
. 393 

394 
. 394 

396 
. 399 

402 
. 405 

409 



ANALYSIS OF CHAPTERS. 



XXI 



(1) The administration of Colbert 
g. High profits do not make protection needful 
h. Nor do high wages 

(1) Analysis of wages .... 

(2) Explanation of low cost of labor . 
T. Objections to protection stated . 

a. It is extra-governmental .... 
h. It is a matter of finesse .... 

c. It is a wasteful way to reach the end proposed 

d. It makes a promise never kept 

e. It gives birth to smuggling and frauds 
/. It defeats itself ..... 

U. The voice of experience on free trade . 
a. The Greek example .... 
h. The Roman example 

c. The English example .... 

d. The imperfect French example 

e. The German example .... 

f. The Belgian example 



411 
413 
420 
421 
422 
424 
424 
425 
427 
428 
430 
430 
431 
431 
431 
432 
435 
4 36 
437 



CHAPTER XIV. 



ON THE MERCANTILE SYSTEM. 

A. Three epochs in the^cience of exchange 

B. Fallacies of the mercantile system . 

a. Illustrations from England and France 

b. Smugglers became the principal traders 

C. First device of the system, prohibitions 

D. Second device, high duties 
a. Illustration from the silk manufacture 
h. Dead bodies must be shrouded in woollen 

c. The guilds ..... 

d. Corn-laws . . • . . 

e. Considerations condemning this device 

E. Third device, bounties .... 

F. Fourth device, colonies . . . 



439 

440 
440 
441 
442 
443 
444 
446 
446 
447 
449 
449 
450 



xxii • ANALYSIS OF CHAPTERS. 

CHAPTER XV. 

ON AMERICAN TARIFFS. 

A. England's policy towards the American Colonies . 451 
" a. The " Navigation Act " .... 452 

h. Prohibitions on manufactures .... 454 

c. Considerations condemning the colonial policy . 455 

B. Want of power to regulate commerce under the Con- 

federation 457 

C. The Tariffs under the Constitution . . . .458 
a. The "Hamilton Tariff" of 1789 . ... 458 

(1) Its low duties . . . . . . .459 

(2) Its steady revenfte 459 

(3) Its principles of tonnage and protection . . 460 
&, The "Calhoun Tariff" of 1816 .... 460 

(1) Unfortunate connection of tariffs with politics . 461 

(2) The restrictive system fairly entered upon . 462 

c. The '• Clay Tariff" of 1824 462 

(1) Higher duties 462 

(2) Protected interests not satisfied .... 462 

d. The "Tariff of abominations" of 1828 ... 463 

(1) Protection had become unpopular . . . 463 

(2) Daniel Webster first votes for protection . 463 

e. The " Compromise Tariff" of 1833 . . . .463 

(1) Presidential canvass hostile to protection . 463 

(2) The sliding scale of lower duties . . . 463 
/. The "Whig Tariff" of 1842 . .... 464 

(1) Average of duties very high .... 464 

(2) Factitious character of the industry stimulated 464 
^. The "Walker Tariff" of 1846 464 

(1) Low duties, but discrimination . . . 464 

(2) Increase of revenue 465 

A. The "Tariff of 1857" 465 

(1) Lower duties, and increase of free list . . 465 

(2) Falling off, and rallying of revenue . . 465 
t. The " Morrill Tariff" of 1861 465 

(1) It was not called for by the people . . . 466 

(2) Free list too large, and not honestly framed . 467 

(3) Full of iniquitous provisions . . . . 467 



ANALYSIS OF CHAPTERS. xxiii 

(4) It cannot be permanent . . . . ,469 

(5) It will contribute to the downfall of the protect- 

ive principle 471 

CHAPTER XVI. 

ON TAXATION. 

A. Taxation legitimate on principles of exchange . .472 

B. The Right of Property is the power to render services 473 

C. Taxes, then, fall properly on exchanges . . .475 

D. And should be proportionate to them ' . . . 476 

E. Taxes are either direct or indirect . . . .477 

a. Direct taxes fall on income or expenditure . . 478 

b. Indirect on imports or set-vices in transition . .478 

c. An income tax unexceptionable in principle . • 478 

d. Taxes on expenditures, special, and hence objection- 

able " .... 479 

e. A house-tax, however, less so . . . . .479 

f. General advantages and disadvantages of each form 480 

F. Credits are properly taxed 480 

G. Productiveness and propriety of the income-tax . 481 
H. Duties and taxes, to be productive,- should be low . 482 

a. The whiskey-tax 483 

I. Duties and taxes should be simple 483 

a. Specific and ad valorem duties should not be combined 483 

b. Specific duties better than ad valorem . . . 484 

c. The tax on cigars 484 

J. Vexatious and unproductive taxes should be thrown off . 485 

a. Taxes on expenditure . . . . . . 485 

b. The cotton tax unjust 485 

c. The interests of trade 486 

d. A proper free list . . . . . . .486 

e. Productiveness of the Internal Revenue Law . 486 
K. Taxes should be collected just before disbursement . 487 
L. Poorer citizens should be mostly or wholly exempt . 487 



ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER I. 

HISTORY OF THE SCIENCE. 

Political Economy is the science of exchanges, 
or, what is exactly equivalent, the science of value. 
To unfold this science in an orderly manner will 
require an analysis of those principles of human 
nature out of which exchanges spring; an examina- 
tion of the providential arrangements, physical and 
social, by which it appears that exchanges were 
designed by God for the welfare of man ; and an 
inquiry into those laws and usages devised by men 
to facilitate or to impede exchanges. The science 
of value will be soundly based and properly unfolded 
when its propositions systematically arranged are 
shown to be deducible from acknowledged principles 
of human nature, and consonant with the providen- 
tial structure of the world and of society; and when, 
in the light of these propositions, human institutions 
and laws relating to exchanges are explained and 
correctly estimated. An attempt to base and to 
develop the science of value thus will be made in 
the following pages ; but before that work is fairly 
entered upon, it will be well to take a preliminary 
1 



2 ELEJEENTS OF POLITICAL ECONOMY. 

glance at the history of the science, and to trace the 
steps by which successive inquirers have brought 
Political Economy to its present stage of develop- 
ment. 

While labor is as old as the race, and exchanges 
are as old as society, and while doubtless in all ages 
individual inquirers have tasked their minds with 
some portions of the subject, Political Economy as a 
science can hardly be said to have existed till within 
a period comparatively recent. Men exchanged 
among themselves services and commodities, and 
found their account in exchanging, long before the 
dawn of authentic history. The first commercial 
transaction on record dates back about two thousand 
years before Christ. It was the purchase by i^bra- 
ham of the cave and field of Machpelah. " And 
Abraham weighed to Ephron the silver which he had 
named in the audience of the sons of Heth, four hun- 
dred shekels of silver, current money with the mer- 
chant." All this implies at that early day fixed con- 
ditions of trade. There were merchants as a class. 
Silver by weight was already a medium of exchange 
passing from hand to hand. It was current money 
with the merchant. In the absence of written doc- 
uments a bargain was made in the presence of living 
witnesses. It was " in the audience of the sons of 
Heth, before all that went in at the gate of his city, 
that the field and the cave were made sure unto 
Abraham for a possession." An earlier passage in 
the life of Abraham shows that gold as well as silver 
was already reckoned an article of merchandise. It 
is said that Abraham departed from Egypt " very 
rich in cattle, in silver and gold." 



HISTORY OF THE SCIENCE. 3 

Homer makes no mention of money, as he un- 
doubtedly would have done had he been acquainted 
with it, but there are many passages in his poems 
that indicate a brisk direct exchange of products as 
characteristic of those times and countries. There 
was also then and there a sort of common measure 
of things exchangeable. Various things are men- 
tioned in these poems as being worth so many oxen. 
The twenty-seventh chapter of Ezekiel gives a vivid 
picture of the immense commerce centering in Tyre. 
Nineveh, according to the prophet Nahum, " multi- 
plied her merchants above the stars of heaven." 
Herodotus makes the probable statement that the 
Lydians of lesser Asia were the inventors of coined 
money; and the same writer describes with minute 
accuracy the caravan routes by which Carthaginian 
enterprise penetrated the interior of Africa for the 
sake of a trade in dates and salt and gold-dust and 
slaves. The records of the voyages of Hanno and 
Hamilco show the Carthaginians daring unknown 
seas also in the interests of traffic; coasting outside 
the pillars of Hercules, southward to the mouths of 
the Senegal and Gambia, and northward to the 
British Isles. Athens, Alexandria, Venice, Lisbon, 
Amsterdam, London, and New York, have been 
among the busy marts on the Mediterranean and 
the Atlantic, while counterparts to their activity in 
trade have existed in all ages in the farthest east. 

The earliest writer known to us who treated eco- 
nomic subjects at any length is Xenophon. About 
the middle of the fourth century before Christ this 
accomplished Athenian published a treatise " On 
Ways and Means." This early essay, not indeed on 



4 ELEMENTS OF POLITICAL ECONOMY. 

Political Economy, but on some of the subjects with 
which that science has to do, contains, together with 
much that is fallacious, some sound and liberal prin- 
ciples. Its object is to propose methods for enhan- 
cing the prosperity of the Athenian State. Praising 
the soil, the climate, the mines, the coins, the com- 
mercial position of Athens, Xenophon suggests that 
the State offer various encouragements to the settle- 
ment of aliens, in order to swell the active popula- 
tion and increase the revenue from the aliens' tax ; 
that merchants and shipmasters of all nations receive 
special honors in the city; in order to attract more of 
them thither and thus augment the income from 
duties on imports and exports ; that prizes be offered 
the presidents of the courts to expedite the trial of 
commercial causes; that inns, warehouses, and marts 
for the sale of goods be erected at the public expense 
for the sake of the rents; that government as such 
undertake commercial enterprises ; that especially 
the silver mines be worked on the most extensive 
scale, as well on government account as by private 
and joint-stock adventurers, so that the State might 
enjoy direct profits in addition to the prices and the 
twenty- fourth part of the produce of the mines pur- 
chased by individuals; and that finally a council of 
peace be instituted, by whose mediation war might 
be avoided, and the State, in the enjoyment of dura- 
ble tranquillity, enter gradually upon these measures 
of national improvement, which, moreover, ought to 
be begun and continued by consulting the ancient 
oracles, and by supplications to the gods. Xeno- 
phon also wrote a treatise entitled " The House- 
holder," in which there is a discussion of the various 



HISTORY or THE SCIENCE. 5 

parts of domestic economy, and a pretty full treat- 
ment of the subject of agriculture. 

Plato in the eleventh and twelfth chapters of the 
second book of his " Republic," admirably sketches 
one important principle of the science, namely, the 
necessity men are in, from their multifarious wants, 
of uniting in society, in which each individual may 
devote himself to that branch of industry for which 
he is best fitted, and then by exchange supply his 
remaining wants. " More will be done, and better, 
and with greater ease, when every one does but one 
thing, according to his genius, at the proper time, 
and when at leisure from all other pursuits." But 
this speculative view is adduced to account for the 
origin of a political state, and is so far from being 
carried out to its practical applications either eco- 
nomically or politically that Plato goes on to advo- 
cate community of goods in the leading class of his 
ideal state, and the exclusion of husbandmen and 
artisans from all share in the government. 

Aristotle is sometimes called the father of Political 
Economy. He is certainly the father, if not of the 
science, of this name of the science, which name, 
however, he uses in a very different sense from that 
in which it is now used. At the opening of the 
second book of his "Economics" he distinguishes 
economy into four kinds, the regal, the satrapical, the 
political, and the domestic. By the first he means 
the central, and by the second the provincial, admin- 
istration of a great empire like that of Persia ; by 
the third, the administration prevailing in free states; 
and by the fourth, what we also mean by domestic 
economy. It is in the last sense, as indeed the name 



6 ELEMENTS OF POLITICAL ECONOMY. 

[oLKo^^ family, and v6ijlo<:. law) implies, that the ancients 
generally conceive of economy ; and hence, although 
Aristotle is the first to use the term political econ- 
omy, it is not so much in his " Economics" as in his 
" Ethics " and " Politics " that we find his real con- 
tribution to our science. According to Aristotle's 
division of the practical sciences. Ethics treat of the 
nature and welfare of man apart from the social re- 
lations ; Economics view him under the social rela- 
tions of the family ; and Politics under the social 
relations of the state. In all three of these treatises 
accordingly of this transcendent thinker are to be 
found acute definitions, shrewd remarks, and pretty, 
copious information, relating to the proper science of 
Political Economy. This, for example, is a perfect 
definition of property: — ^^Biit by property loe mean 
everything^ of which the value is measured by moneys 
(Ethics, IV. i.) The proper boundary line between 
economy and morals is drawn as follows: — " When- 
ever there is no agreement made about the service per- 
formed, those who confer a favor freely for the sake 
of the persons on whom they confer it, cannot com- 
plain; for the value of it is not measured by money, 
and no equivalent price can be paidP (Ethics, IX. i.) 
The same chapter accurately describes the ultimate 
phenomenon of value as betw^een the two persons 
exchanging : — " For each fixes his mind on that' 
ivhich he happens to want, and for the sake of that 
ivill give what he does giveP Aristotle understood, 
as w'ell as any one understands at present, the func- 
tion of money as a measure : — " Bloney, therefore, as 
a measure, by making things commensurable, equalizes 
them; for there could be no commerce loithovt ex- 



HISTORY OF THE SCIENCE. 7 

change, no exchange ivithout equality, and no equality 
without the possibility of being commensurate^ (Eth- 
ics, V. V.) In direct opposition to Plato's proposed 
community of goods, he insists strongly upon the 
rights and benefits of private property (Pol. II. v.) ; 
apprehends the true origin of money, and that it is, 
in common with all other forms of property, a mere 
means, no more than they, an end in itself (Pol. I. 
ix.) ; and estimates agriculture highly, as the ground 
of all other arts, and as most favorable to health, 
morals and good government. (Econ. I. ii.) Still 
Aristotle was not wholly emancipated from the prej- 
udices of his time. Hemarkable as was his sagacity 
in matters economical, he yet held views incompati- 
ble with a sound and complete science of economy. 
For example, these : — '•'•And indeed the best regulated 
states will not permit a mechanic to be a citizen; for 
it is impossible for one who lives the life of a mechanic 
or hired servant to practice a life of virtue. ^^ (Pol. 
III. V.) " For usury is most reasonably detested, as 
the increase of our fortune arises from the money it- 
self, and not by employing it for the purpose for ivhich 
it was intended" (Pol. I. x.) " /^ is clear then that 
some men are free by nature, and others are slaves, 
and that in the case of the latter the lot of slavery is 
both advantageous and just." (Pol. L v.) 

There appear to be three principal reasons why 
the Greeks, who were so intellectually capable of it, 
did not develop any true system of Political Econ- 
omy. In the first place, their affairs of private life 
were wholly subordinate to those of public life; and, 
consequently, the varied forms of private and associ- 
ated industry could not win that attention, which, at 



8 ELEMENTS OF POLITICAL ECONOMY. 

present, they are able to compel. To the Greeks the 
State was everything, and the individual only that 
which the State allowed him to be. In the second 
place, the institution of slavery threw its shadow 
over most of the branches of industry. It was inevi- 
table that employments committed mainly to slaves 
should seem mean to the free. Only agriculture and 
commerce, carried on on a large scale, and scarcely 
these, escaped this damaging influence. Even Aris- 
totle, who says, " The best nation is a nation of farm- 
ers^' (Pol. VI. iv.), says also, ^^ Neither should they 
who are destined for office be husbandmen^ (Pol. VII. 
ix.) It lessened no man's consideration, however, in 
the public opinion of the Greeks, to have any kind 
of industry carried on on his account, provided he 
did not work at it with his own hands. In the third 
place, the constant recurrence of wars interfered 
sadly with the free expansion of industry. 

Nevertheless, the Greek States showed practical 
good sense in their economical regulations. They 
fell into no such egregious follies as have marked the 
legislation of modern states. There was no inter- 
dicting the exportation of raw materials ; no favor- 
ing of manufactures at the cost of the agricultural 
class ; no prohibitions on the export of specie ; no 
efforts to preserve a factitious balance of trade ; and 
no duties on imports except for purposes of revenue. 
The usual customs' duty in the port of Athens was 
two per cent, of the value of the goods. The duty 
laid by Athens in the ports of her subject-allies was 
generally five per cent. ; and when in a few excep- 
tional cases the rate was raised to ten per cent., it 
was regarded as extortion. In all essential inspects, 



HISTORY OF THE SCIENCE. 9 

therefore, there existed freedom of industry and free- 
dom of trade. 1 

We should expect beforehand that the more prac- 
tical Romans, lovers of law and order, and exhibiting 
to the world many of the high qualities of citizen 
life, would make some valuable contribution to the 
science of exchanges. In this we are disappointed. 
Though in the earlier and better days of Rome, agri- 
culture was highly esteemed, the blighting institution 
of slavery brought labor, the mechanical arts, and 
commerce more and more into disrepute. The lands 
were tilled by slaves. Slaves became the artisans of 
the country. As always happens under such circum- 
stances, the freemen, the citizens, came to feel them- 
selves above such degrading occupations. It is piti- 
ful to hear Cicero declaim against the noble rights 
of labor. In the " De Officiis" there is a whole para- 
graph of condemnation for those branches of man- 
ufacturing and commercial industry which ought to 
be regarded not only as honorable but as the life and 
strength of the State. One sweep of his pen pushes 
out of the pale of respectability the whole class of 
mechanics. " All artisans are engaged in a degrading 
profession," says he. Again, " there can be nothing 
ingenuous in a workshop." Trade and commerce 
fare no better at his hands. When carried on on a 
small scale they are to be regarded as disgraceful ; 
when on a large scale they must not be greatly con- 
demned ! When social prejudices and views of labor 
like these are promulgated by the foremost man of 
his time, the best educated and the most liberal, 

1 See Boeckh's Public Economy of Athens, and Heeren's Ancient Greece, 
chap. X. 



10 ELEMENTS OF POLITICAL ECONOMY. 

there is no longer room for surprise at the lack of 
Roman contributions to Political Economy. 

Moreover, the Roman moralists regarded the accu- 
mulation of wealth as undermining those virtues in 
which they placed the perfection of character. Cato, 
the censor, in his denunciations of luxury, which is 
the result of accumulation, was a representative of 
the whole class of moralists. Their position ought 
not to surprise us for two reasons. First, the stream 
of the Roman wealth, much of it at least, proved a 
curse and not a blessing, not because wealth is not a 
blessing, but because its waters instead of being dif- 
fused everywhere, rushed at once into a few huge 
reservoirs — there was no natural and general distri- 
bution of it. Second, the source of most of the 
wealth was as illegitimate as its absorption by the 
few great families. It did not come from the peace- 
ful and gradual development of the national re- 
sources; it came from conquests, from tributes, often 
from official extortion from the provincials. A 
comprehensive theory of value will hardly be helped 
forward in connection with such moral notions, such 
views of labor, and such methods of gain, as pre- 
vailed at Rome. 

In all that related, however, to the proper acquisi- 
tion and exchange of property, and to the manage- 
ment of the ordinary sources of national income, the 
Romans exhibited a strong sense of justice, together 
with moderation and practical wisdom. They taught 
the world something in the matter of taxation. 
They opened up new sources of revenue, from which 
governments still think it useful to draw. They 
levied duties in their ports as a simple expedient of 



HISTORY OF THE SCIENCE. 11 

taxation. They knew nothing of what has since 
become famous under the name of Protection. The 
rate of the duties in Cicero's time was five per cent, of 
the value of the goods; in the time of the emperors, 
two and one half per cent.; and the highest duty 
known to the Roman custom-house was twelve and 
one half per cent. Augustus introduced an excise-tax 
of one per cent, on the value of all things which were 
sold. The same emperor laid a tax of five per cent, on 
legacies and inheritances. There was a tax on bach- 
elors. In the provinces at least, a door-tax was 
sometimes exacted. The public lands, the mines, 
the salt-works, and especially the tributes, were the 
remaining sources of income.^ 

The confusion consequent upon the breaking up 
of the old E-oman empire; the settlement of the 
barbarian nations in the seats of the ancient civiliza- 
tion ; the gradual growth of feudalism, than which 
no system could be more hostile to a free and varied 
industry ; the almost exclusive occupation of men's 
minds during the Middle Ages, with religious ques- 
tions, and with the intricacies of the disputatious 
schoolmen ; the prevalence of the monkish idea that 
contact with the world was contaminating; the fact 
that the universities were under the control of the 
clergy, who only allowed in them a meagre curricu- 
lum of scholastic studies together with the civil law ; 
and the fact that war and rapine, rather than the 
supply of their mutual wants, gave occasion to the 
intercourse of nations with each other ; all these 
contributed to divert attention for centuries from the 
subject-matter of the science of exchanges. 

1 See articles " Vectigalia " and " Portorium " in Diet, of Antiquities. 



12 ELEMENTS OF POLITICAL ECONOMY. 

In our survey thus far, if we have found little pos- 
itive light thrown as yet upon the science of value, 
we have at least discovered some of the reasons why 
such light could not be thrown. Absence of inves- 
tigation and discussion however does not necessarily 
imply the lack of a theory. In truth, there was a 
half-developed theory of value, which exerted a pro- 
digious influence, certainly from Cicero's time, even 
down into the seventeenth century. It is remarkable 
that this earliest general doctrine of value, which I 
shall venture to call the Bullion Theory, came into 
currency in direct contravention of the great author- 
ity of Aristotle. That philosopher taught clearly 
that money is but an instrument towards a further 
end, and derives all its importance from being an 
instrument; but the later less acute observers, per- 
ceiving that gold and silver were the money of all 
civilized nations, fell into a curious mistake in regard 
to the nature of money, and came to give to these 
metals a factitious importance by regarding them as 
the real and only wealth. They overlooked the fact 
that these metals are a commodity, that they owe 
their value to efforts and desires just as other com- 
modities do, and that they are bought and sold like 
all other commodities. With useful products of any 
kind one can always buy gold and silver. To trade 
is nothing but to barter one commodity for another, 
— to exchange corn for silver and silver for corn. 
Unless the trade is fraudulent, the one is equally 
valuable with the other ; and it would seem as if the 
simple consideration that men are willing to part, 
and do constantly part, with gold and silver to buy 
other things, would have been fatal to the prejudice 
that the preciourf metals are the only wealth. 



HISTORY OP TIIK SCIENCE. 13 

There were however two things that seemed to 
sustain the Bullion theory. One was, that money is 
always the measure of value. " How much is it 
worth ? " The answer comes, so many dollars. Dol- 
lars are the denomination in which value is reckoned, 
just as degrees of the thermometer are the denomi- 
nation by which heat is measured. The difference 
between value itself and the measure of value — be- 
tween a bushel of wheat and that round measure by 
which we determine that there is a bushel — seems 
obvious enough ; but money has this peculiarity, it 
is not only a measure of value, but, so far as this 
expression is ever true of any one commodity, it has 
value in itself. There is no heat in a thermometer, 
and no wheat in a bushel-measure, but a dollar is not 
only a dollar measure, biit a dollar value, and we can 
see how the fact that dollars both had value and were 
the measure of all other values, gave some plausibil- 
ity to the notion that the dollars were all. The other 
thing that made the Bullion theory plausible was the 
use of gold and silver as the universal medium of 
exchange. They came to be such medium simply in 
consequence of their convenience and their nearly uni- 
form value; and because they were such a medium, 
everybody wanted them, and whoever had them 
could get with them whatever else he wanted. Be- 
cause the great thing was to get money, men seemed 
to think that money was the only thing to be got! 

I cannot find that the Bullion theory had anything 
better to support it than these two deceptive pillars ; 
and yet for a very long period, and by many well- 
informed men as well as by all the unthinking, it 
was considered to stand upon an immovable founda 



14 ELEMENTS OF POLITICAL ECONOMY. 

tion. The commercial policy that sprung from this 
theory was obvious and well-nigh universal. If gold 
and silver are the only wealth, then by all means 
keep the gold and silver in the country! Get all 
you can in, and let as little as possible out ! Accord- 
ingly very early the nations passed laws to prohibit 
the exportation of gold and silver. We learn from 
Cicero, incidentally, that this was done repeatedly at 
Rome. In one of his orations he says, " The Senate 
solemnly decreed both many times previously, and 
again when I was consul, that gold and silver ought 
not to be exported." According to Adam Smith, 
there are ancient acts of the old Scotch Parliament, 
which prohibit under heavy penalties the carrying 
gold and silver forth of the kingdom. The same 
thing was done by France and England, and prob- 
ably by every other nation in Europe. Spain tried 
this experiment of prohibition under noticeable con- 
ditions. She had domestic mines, but also became 
proprietor in the sixteenth century of the rich metal- 
lic treasures of Mexico and Peru. The precious 
metals were literally poured into her bosom. Their 
export she prohibited under the severest penalties. 
The prohibition was largely futile, since these are 
things that can easily be smuggled out. So far as 
the prohibition was effective the metals in conse- 
quence sank rapidly in value. They are only good 
to buy with; and as the Spaniards were not allowed 
to buy with them abroad, they soon found that they 
could buy relatively little with them at home ; which, 
of course, increased the smuggling out. Spain per- 
sisted in this policy until her commercial decay 
proved to her and to all the world, not only the folly 



HISTOKY OF THE SCIENCE. 15 

of such attempts to obstruct the natural current of 
conamercial circulation, but also the important truth 
that national wealth consists not in the mere abun- 
dance of gold and silver. Had the Bullion theory 
been correct, to encourage the importation of the pre- 
cious metals, and discourage their exportation, would 
have been the high road to national prosperity. But 
the Bullion theory was not correct; and the clear- 
ness of our views in Political Economy will largely 
depend upon our thorough emancipation from the 
prejudice that gold and silver are any more valuable 
or any more desirable than the products for which 
they exchange. They constitute a part, but only a 
small fractional part, of the values of any country. 

About the year 1600, there sprung up in Europe 
a second general commercial theory, which is usually 
termed the Mercantile System. It took its origin 
somewhat in this way. The discovery of an ocean 
path to the Indies, the great improvements in navi- 
gation, and the general waking up of the spirit of 
enterprise in the preceding century, gave a vast 
extension to commerce. The English merchants, 
particularly, found the prohibitions against the ex- 
portation of gold and silver very inconvenient. 
They found that, by carrying gold and silver to the 
East Indies, they could bring back articles worth 
greatly more in England than the specie they car- 
ried out; that is, with the imports they brought in 
they could buy more gold and silver than the sum 
they had exported. Therefore, in the year 1600, the 
English East India Company asked and obtained 
leave of Parliament to export a limited quantity of 
gold and silver. The adherents of the old theory 



16 ELEMENTS OF POLITICAL ECONOMY. 

raised a great storm, alleging that this Company 
would impoverish the kingdom by gradually drain- 
ing off the gold and silver, that is, the national 
wealth. 

The advocates of the Company, on the other 
hand, though they did not venture to assail the doc- 
trine that wealth consists in gold and silver alone, 
took narrower ground, and asserted that the export 
of money is advantageous, whenever the articles 
bought by it and imported, are chiefly reexported to 
other Countries and sold for as much money as was 
originally carried out; and also whenever the export 
of coin, and the consequent import of commodities, 
occasions, though indirectly, a greater value of ex- 
ports from home of native products. Thomas Mun, 
a writer of that period, quoted by Adam Smith, 
compares the trade of the merchant exporting gold 
and silver, to the seed-time and harvest of agricul- 
ture. " If we only behold," says he, " the actions 
of the husbandman in the seed-time, when he cast- 
eth away much good corn into the ground, we shall 
account him rather a madman than a husbandman. 
But when we consider his labors in the harvest, 
which is the end of his endeavors, we shall find the 
worth and plentiful increase of his actions." In a 
word, the Mercantile System reasoned thus : If a 
country only exports more than it imports, then the 
balance must come back in gold and silver; and if 
it keeps exporting more than it imports, and the 
balance keeps coming back in gold and silver, then 
the country must grow rich. Hence the great and 
only care was to preserve the balance of trade, as it 
was called. A famous phrase this, the balance of 



HISTORY OF THE SCIENCE. 17 

trade! The legislation, the diplomacy, the politics 
of the two centuries preceding the present were full 
of it. 

By the balance of trade was meant the excess of 
the value of the commodities exported over the 
value of the commodities imported, which excess, it 
was supposed, would always come back in the form 
of gold and silver. Hence unlimited pains were 
taken to make the exports greater than the imports, 
and the excess was regarded as the measure of a 
country's commercial prosperity. Various devices 
were employed to make the exports great and the 
imports little. To increase the amount of exports, 
bounties were offered to domestic producers, to en- 
courage them to sell as much as possible to foreign 
countries. With the same end in view, the raw ma- 
terials of domestic manufactures were forbidden to 
be exported, so that the finished products, thereby 
rendered greater in amount, might help swell the 
exports. Colonies were planted with similar intent, 
that the mother country might find an open market 
there, and swell her exports. To diminish the aggre- 
gate of imports, prohibitions were laid on the bring- 
ing in from abroad articles which could be made or 
grown at home ; and heavy restrictions imposed on 
imports from those countries with which the balance 
was supposed to be unfavorable, while the same 
articles, perhaps of an inferior quality, were admit- 
ted on easier terms from countries with which the 
balance was supposed to be better. Thus every- 
thing was sought to be regulated in view of an 
imaginary balance of trade. The Mercantile System 
was the prolific mother of those commercial restric- 



18 ELEMENTS OF POLITICAL ECONOMY. 

tions, those attempted regulations of manufactures, 
those doctrines of monopoly, of corn-laws, and colo- 
nies, which have fettered industry almost up to the 
present time. 

The particular fallacies that lurk in the Mercantile 
System, and the tortuous and cramping policy that 
grew out of it, will be more fitly discussed at a later 
stage of our inquiries ; this is a proper place to indi- 
cate in general that the whole system is based on a 
misapprehension. It overlooks entirely the mutual 
benefit to the parties of every act of exchange, with- 
out which benefit the exchange clearly would not 
take place at all, and makes the whole advantage of 
commerce consist in a certain balance of gold and 
silver, which comes back to that one of the parties 
which has managed to part with more of its own 
commodities. It seems strange that it did not occur 
to those people, that, if it were worth while to trade 
at all, the benefits of the .trade were rather to be 
measured by the amount and value of what was 
received, than by the amount and value of what 
was parted with I Moreover, the system takes for 
granted, that traders carry forth goods to foreign 
countries to receive back goods and bullion worth as 
much, — less goods, indeed, and the balance in bul- 
lion. Why on that principle should the goods be 
carried forth at all ? The labors, the risks, and the 
exchanges all made ; the goods and the balance 
received; and the country just as well, but no bet- 
ter off" than before ! One thing is certain and obvi- 
ous. Unless the imports, whether including any 
specie balance or not, are worth more in the country 
importing, than the exports, they certainly would 



HISTORY OF THE SCIENCE. 19 

not be imported. This difference of wortli in favor 
of the imjDorts is precisely the motive for the impor- 
tation. If they are worth only as much as, or less 
than, what is exported to pay for them, where is the 
advantage of the trade ? Speaking generally, then, 
the worth of the imports into any country is always 
greater than the worth of the exports, the comparison 
of course being made in that country and not else- 
where. The whole wisdom of the Mercantile Sys- 
tem was to sell as much as possible and buy as little 
as possible, — a wisdom which is evident folly, inas- 
much as, universally applied, it would destroy the 
commerce of the world. 

The leading commercial nations of Europe, nev- 
ertheless, fell into the meshes of the Mercantile 
System. Portugal, Spain, France, Holland, and 
England, all gave their attention to the balance of 
trade, all laid restrictions on the natural freedom 
of industry, and all applied the system rigidly to 
their colonial dependencies. These restrictions on 
trade, especially on the importation of manufactured 
goods, and on the exportation of corn and raw mate- 
irals, to say nothing of the bounties which the people 
were taxed to pay, were to the last degree vexatious 
and onerous ; while the penalties for their infringe- 
ment were in many cases cruel and even barbarous. 
Various writers in the different countries, and partic- 
ularly in England, where the laws in question were, 
perhaps, the most oppressive, began to attack the mer- 
cantile theory and the policy that had grown out of 
it. And it is to this series of writers in long succes- 
sion, some overthrowing one false position, and some 
another, one establishing a truth here and another 



20 ELEMENTS OF POLITICAL ECONOMY. 

there, that we owe the gradual development and 
present state of the science of Political Economy. 
The science has gradually emerged from the waves 
of thought dashing and roaring around the Mercan- 
tile System. It is still necessary, at least on the 
continent of Europe and in the United States, to 
3orabat some of the remains of the old mercantile 
legislation. England is believed to be the only coun- 
try which has erased from her statute-book the last 
vestiges of the system. This she has done in direct 
consequence of the skill and power with which the 
political economists have guided the public opinion 
of that country ; and it is on account of their suc- 
cess, as well as on account of the superior num- 
bers and weight of English thinkers in this field of - 
inquiry, that it is proper now to consider first the 
English contributors to the modern science of Politi- 
cal Economy. We shall then attend to what the 
French have done towards building up the science ; 
and, with a few remarks on the Italian and German 
writers, shall close this sketch with a brief recital of 
American views and writers. 

It is not necessary in a book like the present to go 
into much detail respecting individual authors, or 
their claims to priority of discovery in the realm of 
economical truth. This has already been well done 
by Mr. McCuUoch in the " Introductory Discourse " 
prefixed to his admirable edition of Adam Smith's 
" Wealth of Nations," to which I am indebted for 
some of the facts and thoughts already stated, and 
soon to be stated, in this chapter; and exhaustively 
done by Mr. Macleod in his recent " Dictionary of 
Political Economy." My obj(^ct is to give a brief 



HISTORY OF THE SCIENCE. 21 

but just outline of the labors of the principal think- 
ers, with the practical aim of preparing my readers 
for a better apprehension of the discussions which 
follow. 

Omitting the pamphleteers, who not seldom struck 
upon an important truth here and there in their zeal- 
ous debates on questions of taxation, trade, poor- 
laws, or other point of government policy ; and who 
are to be regarded as the pioneers in economical dis- 
covery, pushing their way into the wilderness in one 
direction and another, and thus, as it were, piloting 
the great writers who came after, — John Locke may 
first be mentioned, whose " Two Treatises of Govern- 
ment" were published in 1690, in justification of the 
English Revolution of 1688, in which he incidentally 
illustrates the distinction betw^een utility and value, 
and all but establishes this one of the fundamental 
truths of Political Economy, namely, that value is 
the birth of effort, and not the gift of Providence. 
He says : — " For it is labor indeed that puts the dif- 
ference of value on everything ; ^^ again: — ^^ What- 
ever bread is worth more than acorns^ wine than water, 
and, cloth or silk than leaves^ skins or moss, that is 
wholly owing- to labor and industry ; " again : — " ii! is 
labor then that puts the greatest part of value upon 
land, without which it would scarcely be worth any- 
thing ; " and once more : — " Supposing the world 
given, as it was, to the children of men in common, we 
see how labor could make men distinct titles to the sev- 
eral parcels of it for their private uses.'"^ These pas- 
sages are an early, if not the very earliest, statement 
of a truth destined in our own day to transform the 

1 Locke, book ii. sections 39, 40^ 42, 43. 



22 ELEMENTS OF POLITICAL ECONOMY. 

face of the science of economy ; but Locke himself 
was hardly aware of its pregnant nature, and did not 
deduce from it the conclusions which it is well able 
to bear. In the controversy concerning the recoin- 
age of silver money in the same reign, Locke did 
good service by his tracts on money, in preventing 
the lowering of the currency standard, and in diffus- 
ing sound principles (not unmixed with several 
errors) on the nature of money. He justly taught 
that it was as absurd for the State to attempt to fix 
the price of money, as to fix the price of cutlery or 
broadcloth.^ 

David Hume, more distinguished as a historian 
and writer on strictly philosophical subjects, must 
yet be mentioned with honor in any sketch of the 
rise of the science of economy. He was the friend 
and forerunner of Adam Smith. His ^Political Essays 
were published in 1752. The titles of some of these 
are as follows: — "Of Commerce," "Of Money," 
" Of Interest," " Of the Balance of Trade," " Of the 
Jealousy of Trade," " Of Taxes," " Of Public Cred- 
it." In these essays are to be recognized, not only 
the clear-flowing style which makes it always a 
pleasure to read Hume's " History of England," but 
also liberal sentiments largely emancipated from the 
fetters of the mercantile system. The views pro- 
pounded are interesting even where they are not 
sound. Of commerce, he says, " Foreign trade, by 
its imports, furnishes materials for new manufactures : 
and, by its exports, it produces labor in particular com- 
modities, which could not be consumed at home. In 
shorty a kingdom that has a large import and export^ 

1 Macaulay's England, chap. xxi. 



HISTORY OF THE SCIENCE. 23 

must abovnd more with industry, than a kingdom that 
rests contented with its own commodities. It is there- 
fore more poiverfid, as ivell as richer and happier.'^ 
I am aware of no earlier hint of the great truth 
afterwards fully developed by Say, that there can 
never be a general over-production, than these words 
from the same essay: — ^^ If strangers will not take 
any particular commodity of ours, we must cease- to 
labor in it. The same hands ivill turn themselves to- 
wards some refinement in other commodities ivhich 
may he wanted at home; and there must always be 
materials for them to work upon, till every person in 
the State who possesses riches, enjoys as great plenty 
of home commodities, and those in as great perfection 
as he desires ; which can never possibly happen." 
The absurdity of the then current notions concerning 
the Balance of Trade is triumphantly exposed by 
Hume, in the essay under that title; and in the con- 
clusion of the essay on the Jealousy of Trade, occur 
these noble words : — " / shall therefore venture to 
acknowledge, that, not only as a man, but as a British 
subject, I pray for the flourishing commerce of Ger- 
many, Spain, Italy, and even France itself^ Hume 
throws some new light on the subject of Money ; 
although his discussion of it is marred by the as- 
sumption, that a less quantity of the metals would 
answer every purpose of commerce as well as a 
greater, and have as much value ; which would only 
be true on the supposition that the less quantity cost 
as much effort to produce it, and its minuter sub- 
divisions were as convenient in exchange; — a false 
assumption from which he deduces this very false 
inference: — " Were .all our money, for instance, re- 



24 ELEMENTS OF POLITICAL ECONOMY. 

coined^ and a penny'' s worth of silver taken from every 
shillings the new shilling would probably purchase 
everything that could have been bought by the old; 
and domestic industry, by the circulation of a great 
number of pounds and shillings, would receive some 
increase and encouragement.^^ Are men, then, usu- 
ally willing to consider ^|- equal to |f ? Besides, 
Hume did not attempt to analyze value, or to ground 
comprehensively the science of Political Economy. 

That attempt was first successfully made by Dr. 
Adam Smith, Professor in the University of Glas- 
gow, who published in 1776 his great work on the 
Wealth of Nations, in which many of the more im- 
portant propositions of the science are established 
beyond the reach of controversy. It will be noticed 
that the publication of this work took place in the 
very year in which American Independence was de- 
clared ; and it was itself a sort of declaration of 
independence of the false principles and foolish pol- 
icy of the Mercantile System. Like the document 
of Jefferson, it excited universal attention : like that, 
it marks an era ; and the results in the economical 
world of the treatise of Smith have been scarcely 
less striking and beneficent than the results in the 
political world of the document of Jefferson. In- 
deed, the merits and originality of Dr. Smith are so 
great, that he has frequently been called, as Aristotle 
has been by others, the father of Political Economy. 
It is not just that that title should be borne by either 
the one or the .other; the science has grown up very 
gradually, and through the contributions of a great 
many thinkers; but the most prominent name among 
them all is now, and doubtless always will be, the 



HISTORY OF THE SCIENCE. 25 

name of Adam Smith. He goes over the whole 
ground, endeavors to bring the principles discovered 
by others and those first demonstrated by himself 
into one harmonious system, and by means of his- 
torical information makes his book as interesting as 
it is instructive by reason of scientific discussion. 
He exalts labor, shows the immense advantages of 
its division, and advocates its unshackled freedom in 
all departments ; he unfolds the benefits of com- 
merce, and mercilessly exposes the weak points of 
the restrictive and regulating devices of the mercan- 
tile system ; he discusses money, capital, profits, 
wages, rent, taxation, and public expenditures. A 
book with such a scope, and published at such time, 
of course contains many errors ; but the wonder is, 
not that there are so many, but that there are not 
more. A groundless distinction made between pro- 
ductive and unproductive labor; the including of 
vendible commodities only in the field of value ; a 
preference given to agriculture over other forms of 
production, and to the home trade over foreign trade ; 
a misapprehension in regard to the nature of rent; a 
want of clear perception of the difference between 
utility and value, and a consequent partial confusion 
in the whole doctrine of values; an occasional in- 
consistency with its own principles, as when allow- 
ing that a State may regulp.te the rate of interest; a 
lack of clear definitions ; a confused arrangement of 
the topics discussed ; and lastly, a prolixity that at 
times becomes tedious; are among the chief defi^.cts 
of the Wealth of Nations. 

Most of the English writers on this subject, since 
the time of Dr. Smith, may be fairly said to belong 



26 ELEMENTS OF POLITICAL ECONOMY. 

to his school. They have corrected many of his 
errors, and made additional contributions to tlie 
science in several respects, but, in the main, have fol- 
lowed out his principles, and, like him, confined their 
discussions of value to tangible commodities. Mr. 
Malthvis, author of a very famous theory of popula- 
tion ; Mr. Ricardo, author of a scarcely less famous 
theory of rent, — both of which theories will be con- 
sidered further on in these pages ; Mr. McCulloch, 
who clearly discriminates between utility and value, 
but erroneously regards labor as the sole constituent 
in the latter; Mr. Senior, author of the able, but not 
sufficiently comprehensive, treatise in the Encyclo- 
pedia Metropolitana ; and Mr. John Stuart Mill, 
whose work has been deservedly more read in this 
country than any of the rest, are the principal figures 
in the long array of writers. The definition of the 
science, to which, in general, they would all assent, 
is. The science which treats of the Production, Dis- 
tribution, and Consumption of Wealth. 

Mr. Horner, Mr. Thornton, and Mr. Huskisson, 
were the joint authors of the Bullion Report made 
to Parliament in 1810, in which the true principles 
of metallic and of paper money are stated with 
demonstrative ability. 

Mr. Macleod, the latest English author of note in 
this field of inquiry, is a very able representative of 
what may perhaps be called the modern school of 
French economists. Their definition of the science 
is the one enforced in these pages also, namely, The 
science of Exchanges. This definition is drawing to 
itself the most recent investigators in France, Eng- 
land, and America; and the scientific development 



HISTORY OF THE SCIENCE. 2T 

of it has already put political economy into a new 
and better posture. According to this view, ex- 
changeability is the only quality requisite to bring 
any service or commodity within the sphere of eco- 
nomic regulation. To Mr. Macleod's " Theory and 
Practice of Banking " I am under obligation for 
some information in matters of fact, and some dis- 
tinctions in matters of science, made use of in some 
of the following chapters. 

If the French have done less than the English in 
building up the science of Political Economy, they 
have done well what they have done. They have 
the honor of publishing the very first general treatise 
under the title of " Political Economy." It was issued 
at Rouen in 1615. To them also is due the credit 
of having furnished the first writer who undertook 
a systematic analysis of the sources of value, and 
whose ingenious speculations gave rise to the first 
school of Political Economy. This was M. Q,ues- 
nay, a physician attached to the court of Louis XV., 
whose book was published in 1758.^ His funda- 
mental positions expressed the reaction from the 
principles of the Mercantile System as embodied in 
the policy of Colbert, the famous finance minister of 
Louis XIV. That policy gave a decided preference 
to the industry of the towns and cities. M. Ques- 
nay appeared as the champion of agriculture. His 
system assumes that the physical earth is the only 
source of wealth, and consequently that labor is 
incapable of producing any new value except when 
employed in agriculture. Artisans and merchants 
are unproductive laborers, because there is no nett 

1 Adam Smith. Book iv., chap. ix. 



28 ELEMENTS OF POLITICAL ECONOMY. 

produce remaining, as in agriculture, over and above 
the expenses of production. The system mistook 
the nature of rent; and falsely though tacitly as- 
sumed that wealth consists in matter. The novelty 
of the theory however, its scientific shape, and the 
liberal commercial policy coupled with it, gave it for 
a time a great reputation ; and it numbered among 
its disciples no less persons than Turgot, the finan- 
cier, and the elder Mirabeau. The former, when he 
became controller-general of the French finances in 
1774, proposed, in accordance with the principles of 
Quesnay, the freedom of labor at home and of trade 
abroad, and the substitution for existing taxes on a 
multitude of articles, of a single tax on land ; and the 
latter was so far carried away by zeal for his master, 
that he puts his work, in point of benefit to mankind, 
on a level with the invention of writing and the in- 
vention of money. The numerous disciples of Ques- 
nay were called Physiocrats, and constituted what is 
termed the early school of French economists. Their 
system is sometimes named the Agricultural System 
in contradistinction from the Mercantile System. 
Their views color many parts of the " Wealth of 
Nations," and afterwards exerted a predominating 
influence in the councils of the French Revolution. 

To make the year 1776 doubly memorable in the 
history of this science, the French philosopher Con- 
dillac published in that year a work entitled "Le 
Commerce et le gouvernement consideres relativement 
run a Vautre." This work was comparatively neg- 
lected at the time, and has never shared the popular 
favor accorded to the other writings of the same au- 
thor, but the definition of the science given in it, 



HISTORY OF THE SCIENCE. 29 

namely, that it is the science of commerce, found 
many years afterwards an intelligent champion in 
Archbishop Whately, to whom the definition is com- 
monly and perhaps properly feferred; and this defi- 
nition or one equivalent, is the one now generally 
accepted. 

In 1803, appeared in Paris, Say's " Traite d'econo- 
mie politique^' which soon became, and is even yet, a 
standard work. Say is a skilful expositor of the sci- 
ence, an able advocate of the freedom of commerce, 
and the original contributor of the important demon- 
'stration that there cannot be a general glut of prod- 
ucts — a general over-production. His doctrine of 
value, however, is infected with a fundamental error, 
namely, the confusion of value with utility, which 
one of his own countrymen was destined completely 
to expose, and to replace with the nucleus of satisfac- 
tory truth. That countryman of his was Frederic 
Bastiat, whose book, entitled " Harmonies econo- 
miques'^ published in Paris in 1850, carried Political 
Economy to a very advanced position, and is the 
most important contribution to the science since the 
time of Adam Smith. The gifted author died the 
same year in which his book appeared, leaving un- 
finished an intention to recast and complete it. It is 
not strictly a treatise of Political Economy, as it 
does not touch upon several of the most important 
subjects comprehended in that title, such as Money, 
Foreign Trade, Taxation, and others, but there is in 
it a masterly definition and exposition of value, and 
a vigorous demonstration of the harmonious mechan- 
ism of society, by which, through the agency of lib- 
erty and property, God has designed the progressive 



30 ELEMENTS OF POLITICAL ECONOMY. 

amelioration of mankind. " All legitimate interests 
are in harmony " is the key-note of the book. Bas- 
tiat encumbers his discussions by the attempt to use 
technically the terra " wealth," and his chapter under 
that title is singularly perplexed and confused, afford- 
ing again for the hundredth time an illustration of 
the impossibility of using that word to advantage 
for any scientific purpose whatever. While unfold- 
ing the laws of value in their manifold applications, 
Bastiat incidentally but most effectually demolishes 
the vagaries of communism, and establishes the right 
of property upon unassailable grounds. It is a 
pleasure to acknowledge in the amplest manner one's 
indebtedness to such a quickening writer as M. Bas- 
tiat is. Whoever will compare carefully with his 
book the following chapters on Value and Land, 
will see how much I have profited by his discus- 
sions; and he will also see that I have made an 
independent, not a servile, use of them. It is hoped 
that the relations of utility to value are even more 
clearly and ultimately put than he has put them. 
Not to have availed myself of the truths which he 
has actually established would be as unjust to sci- 
ence, as not also to have endeavored in the chapters 
on Exchange and Foreign Trade to execute the com- 
mission which he left to his readers in these words : 
— " Z hope yet to find at least one among" them who 
will be able to demonstrate rigorously this proposition : 
the good of each tends to the good of all, as the good 
of all tends to the good of each ; and who will, more- 
over, be able to impress this truth upon menh minds by 
rendering the proof of it simple, lucid, and irrefrag- 
ableP ^ M. Bastiat defines Political Economy as the 

1 Stirling's Translation of the flarmunies, page 92. 



HISTORY OF THE SCIENCE. 31 

Theory of Exchange, and Value as the Relation be- 
tween two Services exchanged. His system turns 
on the technical use, definition, and analysis of the 
term Services. He derives all the economic phenom- 
ena out of the fundamental facts of human Wants, 
Efforts, and Satisfactions. Value cannot exist sep- 
arately from human efforts. Utility resides in the 
materials and forces of Nature. " But these natural 
forces, in themselves, and apart from all intellectual or 
bodily exertion, are gratuitous gifts of Providence, 
and in this respect they remain destitute of value 
through all the complications of human transactions. 
This is the leading idea of the present work." Thus 
he himself expresses the matter.^ 

The Italian writers, though voluminous and re- 
spectable, have originated comparatively little within 
the field of this science. Several of them com- 
menced during the seventeenth century to investi- 
gate the nature of money, and came to the sound 
conclusion that goveriiments have no right to tamper 
with the standard of value used by their subjects. 
As early as 1764, a professorship of Commerce and 
Political -Economy was instituted at Naples, and 
Antonio Genovesi, to whom Say and others would 
assign a high rank among the contributors to the 
science, was appointed to lecture in it. This was 
the first established professorship in this department 
of knowledge. A collection of the best Italian 
writers on the subject was undertaken, under the 
patronage of Napoleon, in 1803, and subsequently 
completed in fifty volumes octavo. 

The Germans have done more perhaps for the 

1 Stirling's Translation, page 62. 



82 ELEMENTS OF POLITICAL ECONOMY. 

science of economy through their public action in 
the Zollverein, than through the private contributions 
of their numerous economical writers. The Zollve- 
rein, or Customs Union, was commenced by Prussia 
in 1818, and has received the adhesion from time to 
time of other German States, until now it embraces 
all of Germany except Austria. Within this broad 
territory, embracing a population of about 35,000,000, 
the duties on imports are uniform, and uniformly 
low; and there is no duty on exports except on 
paper-rags.i All interior custom-houses are swept 
away. No foreign articles are excluded ; many are 
admitted free of duty; and those on which duty is 
charged are arranged in thirty-seven simple classes, 
the duties being always specific (generally by the 
hundred weight), except in the case of carriages and 
ships, on which the duty varies from five to ten per 
cent, of value. The commercial prosperity induced 
by these liberal regulations, the steadily enlarging 
revenue from these low duties, and the growth of 
domestic industry by the side of these practically 
unrestricted importations, have taught the world a 
more valuable lesson than often falls to the lot of an 
individual thinker to teach. It is true that the 
founders of the Zollverein were not wholly free from 
the prejudices of the mercantile system, but the re- 
sults of the experiment so far confirm anything 
rather than the principles of that system. Friede- 
rich List, an early champion of the Zollverein, some 
time also a resident of the United States, who pub- 
lished in English his " Outlines of a New System of 
Political Economy," at Philadelphia, 1827, and '■'■Das 

1 Zolltarif des Deutschen Zollvereins vom 1. Juni 1868 ab giiltig. 



HISTVRY VF THE SCIENCE. 33 

Nationale System der politischen Oekonomie" in 
Stuttgart, 1841, and who, while advocating the prin- 
ciple of protection in his books, displayed a multifa- 
rious activity in behalf of many liberal schemes ; 
Ludwig Stein, Professor in Vienna, an indefatigable 
writer and zealous free trader ; and Professor Rau, 
of Heidelberg, a correct and forcible writer and a 
popular lecturer, may suffice, as examples merely, of 
the individual writers of Germany. 

The circumstances of the United States, as well 
in colonial vassalage as in an independent position, 
their experience with almost every variety of paper 
money, the alternations of the national policy in 
respect to trade, the long continued public discus- 
sions on the tendencies and results of a protective 
tariff, and the efforts — State and National — which 
have been made towards realizing a healthful cur- 
rency, have been favorable to the cultivation of 
economical studies. To these circumstances may 
now be added the pressure of a vast public debt, the 
opportunity of watching the operation of a national 
banking system, and the interest attaching to the 
production of gold and silver in the western half of 
the continent. Attention to this subject, however 
great heretofore, is likely to be greater in the time to 
come. 

The Reports of the Secretaries of the Treasury, 
particularly those of Mr. Hamilton, Mr. Gallatin, Mr. 
Walker, and Mr. McCulloch, have treated many 
branches of the subject with marked ability. jNIuch 
economical truth has been brought out also in con- 
gressional speeches, for example, in those of Mr. 
Webster, Mr. Calhoun, Mr. Benton, Mr. Silas 

3 



84 ELEMENTS OF POLITICAL ECONOMY. 

Wright, and more recently, Mr. Garfield. Congres- 
sional reports, like that of -Mr. John Quincy Adams 
on Weights and Measures, and that of Mr. Kasson's 
late committee on the Metric System, have illus- 
trated portions of the subject. Treatises more or 
less formal and complete have been written by Daniel 
Raymond (1820), John Rae (1834), Henry C. Carey 
(1835-1860), Professor Vethake, President Wayland, 
Stephen Colvvell, George Opdyke, Professor Bowen, 
E. Peshine Smitli, Professor Bascom (1859), Charles 
Moran (1860), E. B. Bigelow (1861), Amasa Walker 
(1866), John A. Ferris (1867), and by many others. 

The economical works of Mr. Carey are to be no- 
ticed the more particularly, because he claims as 
original with himself some of the fundamental posi- 
tions of M. Bastiat. It is certain that these positions 
are common to the two writers; and it is to be pre- 
sumed that M. Bastiat profited by some of the views 
of Mr. Carey ; but there is enough that is distinctive 
in the two authors to justify the claim of each to 
both originality and merit. Among Mr. Carey's 
central principles may be enumerated the following: 
That land gains all its value from human labor; 
that, as a general law, poorer soils are first cultivated, 
and then those more fertile and difficult; that it is 
not so much the cost of production as what would 
be the cost of reproduction, that determines the 
value of commodities; that the real interests of 
classes and individuals are essentially harmonious ; 
that there is a constant tendency to increase in the 
wages of labor, and to diminution in the rate, 
though to inci'ease in the aggregate, of the profits 
of capital ; that the well-being and advancement of 



HISTORY OF THE SCIENCE. 35 

society correspond to the degrees of association and 
of liberty which exist in it ; and that the prices of 
land, labor, and raw materials, tend constantly to 
approximate the prices of finished commodities, and 
in the closeness of this approximation is to be found 
the best gauge of advancing civilization. It is proper 
to add that Mr. Carey's view of the fundamental 
idea of value, of the nature of money, and of the 
means requisite to reach free trade among the 
nations, are tacitly or expressly controverted in the 
chapters that follow. 



ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER 11. 

FIELD OF THE SCIENCE. 

When Adam Smith taught Political Economy in 
the University of Glasgow, it was as a branch of 
moral philosophy, and the substance of his " Wealth 
of Nations" was delivered first in the form of lectures, 
which made up a part of his moral philosophy course. 
That course was divided into four parts: the first com- 
prising natural theology ; the second, ethics, or what 
Paley terms the science of duty and the reasons of 
it; the third jurisprudence, or that part of morality 
which relates to justice ; while in the fourth part he 
examined those political and social regulations which 
are founded on expediency, and which tend to in- 
crease the prosperity and power of a State. 

Now, expediency is so radically distinct from duty 
that there is no need of proving that Political Econ- 
omy is not to be reckoned a part of moral philosophy 
at all. The idea of obligation, on which the science 
of morals is founded, and the idea of value on which 
the science of economy is founded, are totally dis- 
tinct ideas. There is one word that marks and cir- 
cumscribes the field of morals. That word is Ought. 
There is one word that marks and circumscribes the 
field of economy. That word is Value. Political 
Economy does not aspire to place its feet upon the 
ponderous imperatives of moral obligation. It finds 



LIELD OF THE SCIENCE. 37 

a solid and adequate footing upon the expedient and 
the useful. As a science, it does and must discuss 
and decide all questions upon economical grounds 
alone. As a science, it has no concern with ques- 
tions of moral right. If it favors morality, it does so 
because morality favors production. It favors hon- 
esty because honesty favors exchange. It puts the 
seal of the market upon all the virtues. It condemns 
slavery, not because slavery is morally wrong, but 
because it is economically ruinous. Moral science 
appeals only to an enlightened conscience, and cer- 
tain conduct is approved because it is right, and for 
no other reason. Political Economy appeals only 
to an enlightened selfishness, and exchanges are 
made because they are mutually advantageous, and 
for no other reason. Each of the two sciences, there- 
fore, has a distinct basis and sphere of its own. The 
grounds of Economy and morals are independent and 
incommensurable. 

Every science, however, has its points of contact 
with other sciences ; and this is particularly the case 
with Political Economy in relation to moral science, 
and is the reason why the two have sometimes 
been confounded. The sound conclusions of the one 
are harmonious with the sound conclusions of the 
other. Both work together for the good of men, for 
the amelioration of their condition. Their spheres, 
though distinct, nevertheless touch each other. Duty 
and interest lie alongside. The ultimate analysis 
of property, for example, will, as we shall see, lead 
the inquirer into the higher region of moral science. 
In legislation also, the question is frequently at the 
same time an economical and a moral question. Dr. 



88 ELEMENTS OF POLITICAL ECONOMY. 

Wayland has observed that " almost every question 
of the one science may be argued on grounds belong- 
ing to the other." But the grounds themselves, it is 
important to remark, must be seen to be, and must 
be kept, distinct. 

In the next place, the very name of the science in- 
dicates that it is a political, that is, a social science. 
[t relates to men in a state of society, and not to 
men in a state of isolation. The hermit, \vho neither 
buys nor sells, who neither gives nor receives any- 
thing in exchange, is not amenable to the laws of 
Political Economy. So far as men satisfy their own 
wants by their own efforts without exchange, they 
stand outside the pale of this science. Under those 
circumstances the idea of value could neither have 
birth nor being, and of course there would be no 
such thing as a science of value. Robinson Crusoe 
came to lead a very tolerable life upon his desolate 
island by means of his own industry. He worked, 
but then he worked to satisfy his own wants directly. 
He did everything for himself. He had no oppor- 
tunity to buy anything, sell anything, exchange any- 
thing. The'whole course of such a life could never 
have developed the idea of value, and the record of 
the whole experience of such a solitary individual 
would require no such word as value. If God had 
made men so that their varied wants would best be 
met by applying their own efforts to satisfy these 
wants directly, without the intervention of exchange, 
there would have been, there could have been, no 
such science as the one to which attention is now di- 
rected. In that case, men would live, if they lived 
at all, in perfect isolation. Every man would satisfy 



FIELD OF THE SCIENCE. 39 

his own oesires by his own efforts. There would oe 
no society, and no exchange. 

But it is evident at the very first glance, that the 
Creator has not made men thus. Society is God's 
handiwork. It is the most complicated and the 
most wonderful, as it was the final, work of his 
hands. The first man, as he stood alone in Para- 
dise, was indeed a wonderful structure, — wonderful 
in his body, and in all his mental and spiritual pow- 
ers. But it was not good that the man should be 
alone. Society must be provided for ; and in pro- 
viding for a society of human beings, God impressed 
upon that organization, as upon ail others, its own 
proper and peculiar laws. These laws embrace its 
entire organization, in its lower, as well as in its 
higher, parts. They cover the phenomena of ex- 
change, just as they cover the phenomena of morals ; 
and no intelligent observer can watch their working, 
when left intact and free, without being stimulated 
and gladdened by the beneficent results to which 
they lead. If the footsteps of providential intelli- 
gence be found anywhere upon this earth, if proofs 
of God's goodness be anywhere discernible, they are 
discernible, and are found in the fundamental laws 
of society. Certainly, if every man could satisfy all 
his desires as well, by putting forth his eiforts to that 
end directly, he would do it. He would grow his 
own food, make his own clothes, write and publish 
his own newspaper, be his own doctor, in one word, 
perform all needed services for himself. But God 
has so ordered it that he cannot do this. He cannot, 
in a state of isolation, with all his efforts, procure for 
himself one thousandth part of the comforts which 



40 ELEMENTS OF POLITICAL ECONOMY. 

he easily procures for himself by less efforts, througn 
exchange. Society and exchange are, under God's 
ordination, matters of necessity, if men are to rise in 
a scale of comforts perceptibly above the brutes. 
And the reason is this. There are obstacles, in all 
directions, to the satisfaction of men's desires. If 
the desires are to be met, these obstacles are to be 
surmounted. But if one man undertakes to sur- 
mount any considerable number of these obstacles, 
he miserably fails. His powers are not adequate to 
the task ; and hen-ce we say, that in a state of isola- 
tion, men's wants exceed their powers. But, if he 
devote himself to surmounting one class of obstacles, 
as, for instance, those in the way of procuring suita- 
ble clothing, his powers are adequate to this, he soon 
acquires skill in it, he learns to avail himself of the 
gratuitous help of Nature, and the facilitating pro- 
cesses of art, he is able to realize large products along 
his line, and is now in position to offer valuable ser- 
vices to society. Meanwhile other men have been 
devotinsr themselves each to another class of obsta- 
cles, have concentrated effort and skill upon them, 
have succeeded by the help of Nature and art in sur- 
mounting them, and now offer their valuable services 
to society. 

Now, then, these services are mutually exchanged 
in all directions, and men find, as it is God's clear 
design that they should find, that, by making given 
efforts along one line, and exchanging them for cor- 
responding efforts along other lines, they obtain vast- 
ly greater satisfactions for their various desires than 
they could obtain by direct effort. Why ? Because 
there is now a vast increase of useful products in 



FIELD OF THE SCIENCE. 41 

existence. Here we have reached, provisionally, the 
true explanation of the gains of exchange. It is not 
so much that by exchange men get better and cheaper 
articles, as it is that they get more of them. By 
the division of employments, which is only possible 
under a system of exchange ; by the fact that, under 
free exchansfe, men avail themselves of all the varied 
advantages of Nature and position ; the number and 
variety of useful products created, the number and 
variety of the services which men are able to render 
to each other, are immeasurably augmented. More 
is produced, more is to be exchanged, and therefore 
there are more satisfactions of all men's desires. 
Political Economy, therefore, which unfolds the rea- 
sons and the laws of exchange, finds its only field 
in a state of society. It is truly a political, that is, 
a social science. 

In determining now more definitely still the field 
of our science, we will look at some of the leading 
definitions of it which have been given by different 
writers. Mr. Senior defines it " the science which 
treats of the nature, the production, and the distri- 
bution of wealth." Mr. McCuUoch regards it "the 
science of the laws which regulate the production of 
those material products which have exchangeable 
value, and which are either necessary, useful, or 
agreeable to man." Archbishop Whately gives it 
the name of " catalactics, or the science of ex- 
changes." Among several equivalent definitions 
which he is at pains to give, Mr. Mill places first, — 
" the science which treats of the production and 
distribution of wealth, so far as they depend upon 
the laws of human nature." The French writers 



42 ELEMENTS OF POLITICAL ECONOMY. 

give definitions somewhat broader. M. Storch says 
it " is the science of the natural laws which deter- 
mine the prosperity of nations, that is to say, their 
wealth and civilization." M. Sismondi regards " as 
the object of political economy the physical welfare 
of man, so far as it can be the work of government." 
And M. Say defines it as " the economy of society ; 
a science combining the results of our observations 
on the nature and functions of the different parts of 
the social body." Mr. Carey defines it "the science 
of the laws which govern man in his efforts to secure 
for himself the highest individuality and the greatest 
power of association with his fellow-men." And 
lastly, Mr. Macleod offers the definition, — "the sci- 
ence which treats of the laws which govern the rela- 
tions of exchangeable quantities." 

It will be noticed that in several of the preceding 
definitions the term wealth is introduced as a part 
of the definition. This word wealth has been the 
bane of Political Economy. It is the bog whence 
most of the mists have arisen which have beclouded 
the whole subject. From its indefiniteness, and the 
variety of associations it carries along with it in 
different minds, it is totally unfit for any scientific 
purpose whatever. It is itself almost impossible to 
be defined, and consequently can serve no useful 
purpose in a definition of anything else. It has been 
much debated, for example, among political econo- 
mists, v/hether the term wealth includes anything 
more than material products, such as houses, lands, 
metals, tools, food ; or whether the skill of artisans 
and the services of professional men are also to be 
reckoned as wealth. Some include under the term 



FIELD OF THE SCIENCE. 43 

only material products ; others, as Mr. Mill, widen 
the signification so as to take in those immaterial 
services which result in an increase of material prod- 
ucts; while others still, with evident violence to the 
current meaning of the word, include under it all 
things, whether material or immaterial, for which 
something may be obtained in exchange. Thus the 
meaning of the word wealth has never yet been set- 
tled; and if Political Economy must wait until that 
work be done as a preliminary, the science will never 
be satisfactorily constructed. It is simply impossible, 
on such an indefinite word as this at the foundation, 
to build up a complete science of Political Economy. 
Moreover the word wealth includes the two distinct 
ideas of value and utility, — ideas which must be 
kept perfectly distinct, or else there is no sound think- 
ing and no sound conclusions within this field. Men 
may think, and talk, and write, and dispute to weari- 
ness, but until they come to use words with definite- 
ness, and mean the same thing by the same word, 
they reach comparatively few results, and make but 
little progress. And it is just at this point that we 
find the first grand reason of the slow advance hith- 
erto made by this science. It undertook to use a 
word for scientific purposes which no amount of 
manipulation and explanation could make suitable 
for that service. Happily there is no need to use this 
word. In emancipating itself from the word wealth 
as a technical term. Political Economy has dropped 
a clog, and its movements ame now relatively free. 

Of the other definitions quoted, against which the 
objection just considered does not lie, some embrace 
too little, and others embrace too much. The only 



44 ELEMENTS OF POLITICAL ECONOMY. 

one which seems to the present writer to be exactly 
right, is the definition given by Archbishop Whately, 
namely, the science of exchanges. This definition, 
or its precise equivalent, the science of value, gives a 
perfectly definit-e field to Political Economy. Wher- 
ever value goes this science goes, and where value 
stops this science stops. Political Economy is the 
science of value, and of nothing else. To determine 
with distinctness what value is, to separate it from 
some things which have often been confounded with 
it, and thus to lay a foundation for the science at 
once satisfactory and complete, will be the Vv^ork of 
the next chapter. But it is in order at this point to 
call attention to the second grand reason of the slow 
advance hitherto made in this field of inquiry. Value 
is a relative word. It is usually defined as purchas- 
ing-power, that is to say, the value of anything is 
its power of purchasing other things. It is not an 
independent quality of one thing, as hardness is a 
quality of a stone, but it is a quality of one thing 
as estimated in a corresponding quality of something 
else. It is not a quality, in and of itself, of gold, but 
a relation which gold holds to other things w^hich 
gold will buy. The notion of value is not conceiva- 
ble except by a comparison of two things, and what 
is more, of two things mutually exchanged. Politi- 
cal Economy therefore is based upon a relative idea, 
and has to do from beginning to end with a relation. 
Now in this there is an inherent difficulty, and a 
difficulty too which can never be obviated. It lies 
in the very nature of the subject. Men much more 
readily apprehend an absolute idea than a relative 
one. They more easily follow a discussion touching 



FIELD OF THE SCIENCE. 45 

the independent attributes of single objects, such as 
length, breadth, thickness, and many others, than a 
discussion touching value, which is not an attribute 
of any one thing, but a relation subsisting between 
two things. I am not aware that this difficulty has 
ever been remarked on by any writer, but I am at 
the same time very sure that it constitutes the prin- 
cipal difficulty in this class of inquiries, and has been 
the main reason of the tardy progress hitherto made 
in them. A careful analysis of the nature of value, 
and copious illustration bestowed upon the elements 
of the subject, will lessen this difficulty as much as 
the nature of the case will allow. To this then we 
next proceed. 



46 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER III. 

ON VALUE. 

If I take up a new lead-pencil from my table, for 
the purpose of examining all its qualities, I shall 
immediately perceive those which are visible and 
tangible. The pencil has length, a cylindrical form, 
a black color, is hard to the touch, is composed of 
wood and plumbago in certain relations to each 
other, and has the quality, when sharpened at the 
end, of making black marks upon white paper. 
These qualities, and such as these, may be learned 
by a study of the pencil itself. But can I learn, by 
a study of the pencil itself, the value of the pencil ? 
Is value a quality ? By any examination of its me- 
chanical, or by any analysis of its chemical proper- 
ties, can I detect how much the pencil is worth? 
No. The questioning of the senses, however minute, 
the test of the laboratory, however delicate, applied 
to the pencil alone can never determine how much 
it is worth. These methods will discover the quali- 
ties that belong to the pencil as such, but I must 
take another method altogether to determine its 
value. 

Will the origin of the word Value help in finding 
a method by which I may discover the value of the 
pencil? The word is derived from the Latin verb 
VALERE, to pass for, to be worth. There is a hint of 



ON VALUE. 47 

a comparison in the original meaning of the term it- 
self. Will the current use of language assist rae 
any further in finding out the way to learn the value 
of my pencil ? In current language, when the value 
of anything is asked, the answer always comes in 
the terms of something else. We ask, How much is 
it worth ? The answer is, so many cents or dollars. 
The cents or dollars are very different things from 
the things whose value we inquire after; and thus 
we see again more clearly that value implies a com- 
parison of two distinct things ; and, if so, of course 
it is useless to try to ascertain its value by a study 
of the pencil alone. But what kind of a comparison 
between two things is needful, in order to ascertain 
the value of either ? There is no use in laying 
down a certain number of cents by the side of the 
pencil for the purpose of fixing its value, as we lay 
down a carpenter's square by the side of a stick to 
ascertain its length ; because the cents have no com- 
mon physical quality with the pencil, as the square 
and stick have in common the physical quality of 
length. A simple comparison determines the rela- 
tive length of the square and the stick, and it makes 
no difference in the result whose the square is or 
whose the stick is. A borrowed square is just as 
good to determine length as any other, since that 
circumstance does not affect the terms of the com- 
parison : also, one man is competent to make the 
comparison, and it is not needful that he be the 
owner of either of the things compared. 

But is a man who does not own a thing compe- 
tent to fix its value ? And is a man who does own 
a thing competent to fix its value by himself alone ? 



48 ELEMENTS OF POLITICAL ECONOMY. 

The true answer to these questions brings out two 
peculiarities of that comparison by which value must 
always be ascertained. Besides the two things com- 
pared, there must be always two persons comparing, 
and each of these two persons must be virtually the 
owner of one of the things compared. Because I 
think my pencil is worth fifteen cents, is it there- 
fore worth fifteen cents ? Somebody else must think 
so too before that fact can be announced. Also, the 
comparison that two thieves make between two 
pieces of stolen goods would not go far in public 
estimation towards fixing the value of either piece 
of goods. Somebody, then, who owns the cents, 
must make a comparison with somebody else who 
owns the pencil, or the value of the latter is not likely 
to be truly ascertained. 

But besides such a comparison, essential as this 
is as towards the end in view, another step is need- 
ful before I can announce the value of the pencil. 
Not simply a comparison but an action also is neces- 
sary. I think it is worth fifteen cents ; an owner of 
cents, with whom the comparison is made, thinks so 
too; is it therefore worth fifteen cents? That is 
more than I can tell yet. I say to him, Will you 
take it and give me fifteen cents for it ? He replies, 
I think it is worth it, but I am not ready to give that 
sum for it this morning. The value of the pencil is 
not yet determined. In order to that there must be 
an actual exchange of the pencil for the cents. 
There must be two things, two persons, a compari- 
son, an actual exchange by which each person shall 
receive in fact or in* ownership that previously held 
by the other, — each rendering something /or the sake 



ON VALUE. 49 

of the thing received, before the determinate value 
of anything is possible to be stated. There may be 
expected value, estimated value, but actual value 
there is none, until a real exchange has settled how 
much the value is. The value of anything is some- 
thing else already exchanged for it. Value is not 
simply a relation subsisting between two things, but 
an actual fact established in connection with those 
two things. Q\dd pro quo is the universal formula 
of value. The pencil is not worth fifteen cents, be- 
cause I have not yet succeeded in obtaining that 
sum in exchange for it. 

Not dealing in pencils, nor liking to chaffer, and 
finding it a little troublesome to discover what the 
value of the pencil ts, I ask myself what its value 
was when I purchased it? That is an easy question. 
Two days ago I paid for it the sum of ten cents, 
United States currency. It was the storekeeper and 
I. I owned the cents and he owned the pencil. We 
compared these two pieces of property together, and 
agreed to change ownership in them. I gave him 
the cents for the sake of the pencil, and he gave me 
the pencil for the sake of the cents. How much is 
my pencil worth ? I do not know. How much was 
it worth two days ago ? Ten cents exactly. 

If this preliminary view be just, it is clear that 
value is not in any .true sense a quality residing in 
any one thing, but is a relation of mutual purchase 
established between two things.. Nevertheless, it is 
often convenient to regard value as a quality inher- 
ing in a commodity or service. The convenience of 
such expressions as, the "pencil has value," "gold 
has value," is so great, that science will not consent 



50 ELEMENTS OF POLITICAL ECONOMY. 

to forego the advantage of using them, even though 
they are not scientifically accurate. Science justly 
prefers to make her language intelligible and popular, 
even at the hazard of perpetuating a misapprehen- 
sion. On such subjects as these, she is compelled in 
part to use language as she finds it; but sire is cul- 
pable if she does not fix at the outset with absolute 
distinctness the meaning of her terms, however pop- 
ularly current, and then use the terms, always in the 
same sense, never confounding a term with other 
terms of a similar but not identical significance. In 
allowing, therefore, such expressions as, "gold has 
value," I do not use the term in any other than its 
defined sense, I do not imply that value is a simple 
quality, but I employ shortened forms of expression 
long consecrated by usage, and avoid circumlocu- 
tions sure to become tedious. So also, by using 
language that may imply that value exists before it 
is realized in an actual exchange, I do not admit 
that value exists independently of an exchange ; men 
employ foresight, put forth exertion, practice absti- 
nence, in reference to a future realization of value : 
it is proper, at any rate it is necessary, to speak of 
them as already employed upon value, and of value 
itself as a purchasing-j^oiyer residing in this or that. 
A concession to the exigencies of language is not a 
departure from the exactness of science. It is not, 
accordingly, true, speaking strictly, that value is a 
quality of gold in the sense in which weight is a 
quality of gold, because circumstances are easily con- 
ceivable, and have often occurred, under which gold 
would have no value at all. To the crew of a boat 
abandoned at sea, among whom the last biscuit had 



ON VALUE. 51 

been rationed out, a bag of gold belonging to one of 
the men would not purchase a biscuit belonging to 
another. The inherent qualities of the gold are 
present. It is still hard, and yellow, and heavy. 
But valuable it is not. It will not purchase any- 
thing. Value, therefore, is not an inherent and 
invariable attribute, but is the relative power which 
one thing has of purchasing other things. This 
power in any one thing will vary according to time 
and place and circumstances. It may cease alto- 
gether, as in the case just supposed, or it may rise 
under other circumstances to a very high degree ; 
but whenever it exists, it exists with reference to 
some other thing, which either is, or is supposed to 
be, exchanged with it. Ten cents had the power of 
purchasing my pencil, and my pencil had the power 
of purchasing ten cents. In this transaction the idea 
of value is developed. A similar transaction first 
introduced that idea into the world, and the endless 
succession and variety of such transactions have kept 
the idea in the world, and will keep it here till the 
end of time. Value, then, speaking strictly, is not 
an independent quality of the pencil, any more than 
it is an independent quality of the cents. Both are 
necessary in order that the value of either may be 
conceived of. The value of the cents is estimated, 
is measured by the pencil ; and the value of the 
pencil is estimated, is measured by the cents. In 
one word, value is always relative, and never abso- 
lute. To say that Anything has an absolute value 
is a simple contradiction in terms. 

But why was I desirous to part with good United 
States money for the sake of the pencil, and the 



52 ELEMENTS OF POLITICAL ECOXOMY. 

storekeeper to part with a good pencil for the 
sake of the money ? The answer to this question 
will ground the science of value on the unchanging 
principles of human nature. I experience a want 
which the pencil was adapted to satisfy. He expe- 
rienced a want which the money was adapted to 
satisfy. But between my want and its satisfaction, 
both of which were personal to me, there lay an effort, 
to be made either by myself or by somebody else in 
my behalf. So, between his want and its satisfac- 
tion, both of which were personal to him, there lay 
an effort, to be made either by himself or by some- 
body else in his behalf. If I had chosen to do so, I 
might have made the direct effort necessary in order 
to supply myself with a pencil. I might have made 
the pencil for myself. It would indeed have been a 
long and tedious process, would have required a 
learning of two or three trades, a journey to some 
plumbago-bed, the working and preparation of the 
mineral, and various other subordinate processes ; 
still, in the course of half a life-time it might per- 
haps have been done, and I might by direct efforts 
have supplied myself with a pencil as good as that 
which I purchased. So, too, the storekeeper, unless 
the laws had prevented it, might have procured for 
himself by direct efforts the metal cents which I 
gave him in exchange for the pencil. He might 
have dug the ores for himself, refined, alloyed, and 
minted them. Had we chosen respectively to take 
this course, and each been able to satisfy his own 
particular desire by his own unassisted efforts, the 
processes in either case would have had no relation 
to Political Economy. There would be in each 



ON VALUE. 53 

case a want, an effort, a satisfaction, but there would 
be no exchange. As a matter of fact, however, we 
exchanged the efforts which lay between our respec- 
tive desires and their respective satisfactions. I de- 
sired a pencil, he relieved me of the effort necessary 
to make it, and I experienced the satisfaction. He 
desired the cents, I relieved him of the efl'ort neces- 
sary to procure them, and he again experienced the 
satisfaction. We each experienced our own desires, 
and our own satisfactions, but we exchanged efforts. 
Precisely in this exchange of efforts arose the phe- 
nomenon of value. I parted with my cents, which 
had cost me an effort, in order to satisfy my desire 
for a pencil, because my effort, represented in the 
cents, was less than the effort it would cost me to 
create the pencil. The shopkeeper parted with the 
pencil, which had cost him an effort, in order to sat- 
isfy his desire for the cents, because his effort, repre- 
sented in the pencil, was less than the effort which 
it would otherwise cost him to procure the cents. 
We exchanged efforts, therefore, for our mutual 
advantage. 

The principles of human nature, then, on which 
the laws of value are grounded, are these : Men 
have desires, are capable of making efforts to meet 
these desires, and experience a satisfaction when 
the desires are met. These three are indisputable 
and universal facts. But while the desire and the 
satisfaction are strictly personal to one man, that is 
to say, belong to him and cannot be communicated 
to another, it is not so with efforts. Efforts are ex- 
changeable. You have a desire, I make the effort 
to meet it, and you again experience the satisfaction. 



54 ELEMENTS OF POLITICAL ECONOMY. 

On the other hand, I have a desire, you make the 
effort to meet it, and I again have the satisfaction. 
We exchange efforts, bat experience our own satis- 
factions. Desires, efforts, satisfactions, constitute 
the one circle of Political Economy, and value arises 
in every case from a comparison of two correspond- 
ing efforts. Efforts are naturally irksome. Every- 
body wishes to realize as large a satisfaction as 
possible from a given effort. If, by making that 
effort for another, a larger satisfaction will be real- 
ized than by expending it directly for one's self, there 
is an immediate and pressing motive to make the 
effort for another, and to reach the satisfaction, not 
directly, but indirectly, that is, by exchange. A pre- 
cisely similar motive actuates that other person. If 
his given effort will realize more for himself by be- 
ing put forth for the first man, and by accepting the 
first man's effort in return, he too will be anxious to 
exchange efforts with the first. There is .a mutual 
advantage in thus exchanging. A given effort real- 
izes better satisfactions for each of the parties, and 
the reason for exchanges is thus seen to spring from 
the most active and invariable principles of human 
nature. 

The exchange of the cents for the pencil, and the 
pencil for the cents, is a simple case of value, but it 
is not the simplest. In this case there is an ex- 
change of one commodity for another commodity, 
the idea of value is instantly developed, and we say 
that the pencil is worth ten cents, or, what is exactly 
equivalent, ten cents are worth the pencil. There 
are two things in every exchange, — that which is 
parted with and that which is received. Attention 



ON VALUE. 55 

should be constantly directed to both. Many errors 
in science, and numberless mistakes in legislation, 
have arisen from not attending to this circumstance, 
as if it were the glory of trade to sell rather than to 
buy, whereas it is not possible to sell without buy- 
ing, because the pay must be taken for what is sold. 
In every exchange, therefore, of commodity for com- 
modity, the value of each is expressed in the other, 
and the relation between the two purchasing-powers 
is adjusted. This is the common case. The trade 
of all past ages, and the present commerce of five 
continents, presents us, in principle, with nothing 
different from this. The commerce of the world is 
substantially barter, that is, the exchange of com- 
modities for commodities; and, though many pur- 
chases and sales may intervene, and money may 
play its part in facilitating the exchange, and many 
forms of credit may come in, before the transaction 
is finally closed, these do not alter in the slightest 
particular either the notion of value or its laws. 
Each repeated purchase and sale presents us over 
and over again with the same phenomenon, namely, 
the equalization through exchange of two purchas- 
ing-powers. This is value, and is the sole subject of 
our science. 

The simplest case of value, however, will throw 
light upon the more complex ones, and will be found 
to include them. Tw^o farmers, who are neighbors, 
find, on talking over their respective crops, that one 
Jias more hoeing and less haying this year than 
usual, and the other less hoeing and more haying. 
A says to B, " Come over and help m.e hoe in 
June, and I v/ill go over and help you hay in July." 



56 ELEMENTS OF POLITICAL ECONOMY. 

B agrees. It is a mutual advantage. And so, to 
use the old expression, which is better here than 
any scientific terms could be, they change works. B 
does a service for A, and A does a service for B. 
The two services balance each other. They are 
mutually exchanged one for the other; and in the 
very proposal thus to exchange them the notion of 
value is conceived, and in the exchange itself value 
is both produced and measured. B's help in hoeing 
is worth A's help in haying. 

This exchange of one service for another service 
presents the simplest case of value ; and I now pro- 
ceed to show that it essentially includes all other 
cases. If it can be shown that value is always and 
everywhere the same thing, that it is always and 
everywhere the relation of mutual purchase es- 
tablished BY exchange between TWO SERVICES, 

then will Political Economy be seen to possess one 
grand characteristic of the great sciences, namely, 
simplicity. This can be shown. There are only six 
cases of value conceivable, because there are only 
three kinds of things that are ever economically ex- 
changed. These latter are, 1st. Material Commodi- 
ties,, like the pencil; 2d. Immaterial Services, like 
those of the teacher; 3d. Forms of Incorporeal Prop- 
erty, like a United States bond. We may have, 
then, first, an exchange of commodity for commod- 
ity, as the pencil for the cents ; second, of commod- 
ity for service, as five dollars for the advice of a 
lawyer; third, of commodity for some form of incor- 
poreal property, as a Waltham watch for a copyright; 
fourth, of service for service, as in the case of the 
two farmers just mentioned; fifth, of service for an 



ON VALUE. 57 

incorporeal, as a year's work for a five hundred dol- 
lar bond; and sixth, an incorporeal for an incor- 
poreal, as a bond for so many railroad shares. ^ 
What is mutually transferred in all these cases is the 
ownership or property in something. Material prod- 
ucts may or may not be passed over to the pur- 
chaser at the time of the sale, but the oivnership goes 
over to him in all cases. Personal services, unlike 
material products, are not commonly resalable by 
the purchaser ; sometimes they are, as when one 
hires out for a time his own hired man. Most spe- 
cies of incorporeal property are transferable at will, 
as bank checks, patent-rights, and promissory notes. 
But this transfer of ownership, a feature in all cases 
of value, though less obviously so when simple ser- 
vices are rendered, does not present the best aspect 
for the complete understanding of value. That 
aspect is presented through the term services. 

It is mutual services, as well as mutual ownership, 
that are exchanged in these six cases ; and the word 
services carries us deeper into the central phenomena 
of value. Thus the client, with five dollars in his 
pocket, is just as much in position to do the lawyer 
a service, as the lawyer is in position to do him a 
service. The counsel is serviceable to the client, and 
the dollars are serviceable to the lawyer, and so they 
exchange. And just so when commodities are ex- 
changed with each other. The hatter serves yon 
with a hat, and the shoemaker with a pair of boots, 
and you serve them with six dollars each; or if the 
hatter be in want of boots, and the shoemaker of a 
hat, they serve each other with their respective prod- 

1 Compare Macleod's Banking, page 9. 



68 ELEMENTS OF POLITICAL ECONOMr. 

ucts. In every case of value, therefore, without 
exception, what is really exchanged, whether a com- 
modity intervene or not, are mutual services; and 
value is then produced, and only then, when two per- 
sons are in position to render each other a service ; 
and the respective services being rendered, that is 
exchanged, and the balance being struck, we have 
the value of one expressed in the other. 

Do I, then, obliterate the old distinction between 
services and commodities? Yes, I do, as far as 
the laws of value are concerned. I use the ternci 
" service " in a broad sense, which includes the spe- 
cific sense and something more. I mean by it, the 
rendering of anything' for ivhich something is de- 
manded in return. People sometimes do for others^ 
what are called services, out of sympathy, from be- 
nevolence, from duty ; but the characteristic of these 
is that they are free ; nothing is demanded in return. 
These, therefore, fall in the sphere of morals, and 
are outside the pale of Political Economy. There 
is no such thing as proper exchange within the field 
of morals, and there is nothing else but proper ex- 
change within the field of economy. This principle 
alone marks the boundary -line between the sciences 
referred to. A service, then, in the language of this 
science, and as the word will ' henceforward be used 
in these pages, is anything rendered to another in 
view of a return, and for the sake of a return. The 
man who furnishes you a barrel of apples, does you, 
in this sense^ a service eq^jally with the physician 
who attends upon your fever; and you pay them 
both on precisely the same principles. You render 
to each an equivalent service in return. To pay 



ON VALUE. 59 

them money is to render them a service, just as to 
furnish you apples and medical advice were a ser- 
vice to you. Whether a commodity, as apples, 
intervene or not, is, as far as value is concerned, a 
matter of indifference. The more specific use of the 
term "service," as opposed to a commodity, is in- 
deed convenient, and will, doubtless, continue to be 
used : the broader sense is exceedingly useful, and, 
by its aid, we clear up the whole subject of value. 

This ultimate definition of value, namely, that it 
is the relation of mutual purchase established be- 
tween two services, is substantially, but not in form, 
the definition of M. Bastiat. Mr. Macleod's defini- 
tion is also excellent, though I cannot give it the pref- 
erence : — " The value of any econoiyiic quantity is any 
other economic quantity for which it can be exchanged^'' 
If the question relate to the value of any specific 
thing whatever, Mr. Macleod's answer is-perfect; if 
the question be. What is Value ? the other answer 
seems to me to be equally satisfactory. The reasons 
why we may feel complete confidence in it will ap- 
pear in a more and more striking light as we proceed, 
and until we conclude. 

In the first place, this definition covers naturally 
and easily all those anomalous cases of value which 
have been so hard to reduce under any other general 
view. Take for instance the case of the value of the 
diamond. The English school, and especially Mr. 
McCuUoch, claim that labor is the source of value, 
and that the purchasing-power of everything is pro- 
portioned to the labor which it has cost. But, take 
care. There must be error in this statement. Value 
is not always proportioned to the mere labor the 
thing has cost. Often it is. Frequently it is not. 



60 ELEMENTS OF POLITICAL ECONOMY. 

For example, as I am strolling along the sea-shore I 
accidently perceive a splendid diamond among the 
pebbles. It is but a moment's labor to appropriate 
the prize, but do I on that account sell my diamond 
for one dollar less to the jeweller or the prince ? No. 
I am now in position to do a great service to who- 
ever wants a diamond. I demand a large service 
in return, and get it. I say to the man who wants 
it, give me ten thousand dollars for my prize, and 
you shall have it. It would-be poor mercantile logic 
for him to reply: Your labor is not worth more than 
one cent a minute, and it did not cost you but one 
minute's labor to get that gem, and certainly one 
cent, therefore, is a fair price for the diamond. He 
rather reasons in this way : Can I by going myself 
to the diamond-bearing regions, or in any diamond 
market elsewhere, procure for myself so good a gem 
as this by a less sacrifice than ten thousand dollars. 
He resolves this question mentally ; and, if nega- 
tively, I am sure of getting my price. In that case 
I am offering him a service worth at least ten thou- 
sand dollars. No one else is in position to render 
him the same service at so favorable a rate. If, on 
the other hand, there be other diamond dealers offer- 
ing gems as good as mine for less than ten thousand 
dollars, then I have pitched my demand too high ; 
my service is not worth that sum, because there is 
some other person ready to render the same service 
for a less sum. The value of my diamond, there- 
fore, is proportioned, not to the labor which it has 
cost me, but to the service which I am able to ren- 
der to the purchaser with it, compared with the ser- 
vice which he is able to render to me. I take advan- 



ON VALUE. 61 

tage of his desire for the diamond, and crowd up the 
price as near as I can to the point at which he will 
either forego the possession of a diamond altogether, 
or can obtain a similar one from some other party. 
He takes advantage of my desire for the money, 
and crowds down the price as near as he can to the 
point at which I can either find another purchaser, 
or should prefer to retain the diamond myself. The 
comparison and adjustment of these two, my ser- 
vice to him and his service to me, fixes, for that sale, 
the value of the diamond. 

And here we must stop to notice what an exceed- 
ingly good word the English language provides us 
with, in this term service. It explains perfectly all 
anomalous, as well as all common cases of value. 
It combines in its own proper meaning all the ele- 
ments which make up and which vary value. First, 
it implies always two persons, the person rendering 
and the person receiving the service. Next, it always 
implies some effort on the part of the person render- 
ing, and some satisfaction on the part of the person 
receiving the service. Thus when one service is 
spoken of there is always implied two persons and 
two things, and' the two things are the effort of one 
person and the satisfaction of another. But when 
two services are spoken of as exchanged, as is always 
the case in Political Economy, there is' implied, as 
before, two persons, each of whom makes an effort 
for the other, each of whom is recipient of a satis- 
faction which comes from the effort of the other, 
and each of whom estimates in the light of his own 
satisfaction that which is received as compared with 
that which is rendered. It is this reciprocal estima- 



62 ELEMENTS OF POLITICAL ECONOMY. 

tion alone that constitutes value ; and it is the excel- 
lence, I may almost say the glory of the term ser- 
vice, that it gathers up in its own signification all 
the elements which go to determine value, and which 
ever vary its amount. As here is the very kernel 
and core of our science, illustration will be well 
bestowed at this point. Let the parties be A and 
B, in position to render each otiier a mutual service. 
A has a desire which B's effort can meet, and B has 
a desire which A's effort can meet. Up to the point 
when the exchange takes place there are only four 
elements that play any part in the transaction as 
preparatory to it, namely, two desires and two efforts. 
In the act of exchange itself two other elements 
come into being, namely, two relative estimates, A's 
estimate of B's effort for him as compared with his 
own effort for B, and B's estimate of A's effort for 
him as compared with his own effort for A. As a 
result of the exchange, and as that for the sake of 
which the whole series took place, there appear two 
other elements, namely, two satisfactions. Here is 
the whole of it. Now, then, any change in any one 
of the first four elements will vary value ; and there 
is nothing else in the world that can vary it. If A's 
desire for that which B is ready to render be less- 
ened, the other elements remaining the same, A's 
estimate of B's effort as compared with his own is 
lessened, and value is at once affected. If A's desire 
be increased, other things being equal, his estimate 
of B's service as compared with his own is increased, 
and value is affected. Just so any diminution or en- 
hancement of B's desire for that which A is ready 
to render, acts at once upon B's estimate of A's 



ON VALUE. 63 

effort as compared with his own, and consequently 
acts at once upon value. Again, any change in 
either effort as compared with the other, such as its 
becoming more or less onerous than the other, will 
of course affect the estimate of the one as measured 
by the other, and of course also will vary value. 
These first four elements then are not only the ele- 
ments out of which value subsequently springs, but 
also are the elements any change in any one of 
which, the others remaining the same, will tend to 
vary value, and without a change in some one of 
which, relatively to the others, value never will be 
varied. The term services expresses just these ele- 
ments which play and vary as preparatory to the 
realization of value. Value itself is realized from 
the adjustment of the fifth and sixth elements, that 
is to say, from the equalization of A's estimate of 
B's service with E's estimate of A's service. This 
adjustment also, together with the remaining ele- 
ments, the two satisfactions, are all implied in the 
expression mutual services, or, if you please, two 
services exchanged. If any of my readers object to 
this paragraph as abstract, I have only to reply that 
it is no more abstract than the subject-matter; and 
if any of them find difficulty in the relative nature 
of the transaction unfolded, in the fact that the 
views and comparative estimates of two persons 
must be kept in mind throughout, I can only say, 
that this science starts with a relation and has to do 
with a relation every step of the way to the end. 
This is the one intrinsic, unavoidable difficulty that 
lies at the threshold of the science ; and whoever, 
by taking pains at the outset, familiarizes this diffi- 



64 ELEMENTS OF POLITICAL ECONOMY. 

culty to his thoughts, and thus overmasters it, will 
walk thenceforward with positive pleasure through 
the whole economic domain. And if there ever was 
a science grateful for a word, as lessening its inhe- 
rent difficulties and helping explain its phenomena, 
Political Economy, which has wandered these twice 
forty years in the wilderness of wealth, thankfully 
accepts in the term service its latest and most impor- 
tant gift. 

In the second place, the definition of value which 
is here given expands the field of Political Economy 
to its natural limits. Even Adam Smith, and the 
English economists generally, while defining wealth 
as consisting of material commodities only, have 
experienced a difficulty in excluding from the do- 
main of the science certain mere services, and in 
denying that value resides in these services. Some 
have endeavored to avoid the difficulty in one way 
and some in another. Some have stigmatized those 
who render a mere service to society as unproduc- 
tive laborers, and have gifted with the title of pro- 
ductive laborers all those who bring forvi^ard some 
vendible commodity. John Stuart Mill, as we have 
seen, enlarged his definition of wealth so as to take 
in all those sorts of mere services whose action goes 
directly to swell the volume of material commodi- 
ties. It is conceded then that value resides in some 
services; why not then in all services w^hich are put 
forth for the sake of a return ? Why allow value to 
a service which comes to be embodied in a commod- 
ity, and deny the term to another service just as 
necessary to our comfort that is not thus embodied? 
Why class the brick-maker as a productive laborer, 



ON VALUE. 65 

and refuse the epithet to the hod-carrier, without 
whose help the bricks would never reach their ulti- 
mate destination ? The truth is there is no ground 
for this distinction ; and the very difficulty which 
the various writers have found in trying to make it, 
is a pretty sure proof that it ought not to be made 
at all. By making its definitions such that value 
can only be supposed to reside in tangible commod- 
ities, Political Economy excludes itself, without any 
good reason, from a large portion of its own field. 
Let us see if there be any good reason. For exam- 
ple, a man buys a spelling-book for his boy, for the 
sake of his learning to read. He then hires a teacher 
to teach him to read. According to the usual defi- 
nitions the spelling-book has value, while the service 
of the teacher has none. But why has it none ? It 
has to be paid for, certainly, as much as the spelling- 
book has to be paid for. There are two separate 
exchanges; first, of money for the spelling-book, and 
second, of money for the service. Both are made 
with the same object in view, namely, that the boy 
may learn to read. The want of a spelling-book 
and the want of a teacher are the two external 
obstacles in the way of reaching that object; and 
the father overcomes them both by similar means, 
that is to say, by an exchange ; and there is no such 
difference in the two transactions as will justify or 
even tolerate the distinction sought to be made be- 
tween them. The teacher sells his service. The 
shopkeeper sells his book. The father renders a ser- 
vice to each equivalent to that received from each. 
Political Economy.now claims jurisdiction over both 
transactions alike, and affirms value as truly of the 

5 



66 ELEMENTS OF POLITICAL ECONOMY. 

service as of the commodity, and more truly of the 
service than of the commodity, inasmuch as it stands 
ready to prove that so far as value resides in any 
commodity it resides there simply in virtue of the 
human services which have been concerned in its 
production and which will be subserved by its ex- 
change. What is ultimate, therefore, in all exchange, 
is not commodities but services ; and the services 
which are bought and sold in every department of 
life, the services, for example, of the lawyer, the phy- 
sician, the clergyman, the teacher, the editor, the 
musician, fall as much within the province of Polit- 
ical Economy as the traffic of commodities in the 
market-place. Our science asserts its claim of juris- 
diction wherever services are mutually exchanged. 

A third advantage of the definition of value now 
given, and one closely connected with the last, will 
be seen in the fact that it frees the discussion from 
a perplexing error which has long infected this class 
of inquiries, namely, that value is somehow or other 
connected with matter. This notion has controlled 
the definitions of wealth ; has led, as we have just 
seen, to groundless distinctions among services ; and 
has taken possession of language so thoroughly that 
no judicious writer will attempt at this late day to 
dislodge it from that strongest of the citadels of 
error. Rather than disturb the current nomencla- 
ture of business he will allow such expressions as 
these to stand : Gold has value, strawberries have 
value. But it is very easy to show that value does 
not reside in matter, or in any form of matter, but 
only in human services exchanged ; and that, there- 
fore, value is never of God's creation, but always of 



ON VALUE. 67 

men's exertion. We shall see abundantly, before 
we finish the chapter, that utility is one thing and 
value quite another. No effort of men can add one 
particle to the existing matter of the globe, but it has 
been supposed that the efforts of men, by changing 
the form of existing matter, impart the quality of 
value to it, and that thenceforth the value remains 
fixed in the matter itself. The efforts of a woodman, 
for example, with the cooperation of nature, can trans- 
form the stock of a tree into wooden bowls, and value 
is now supposed to reside in the vendible bowls, and 
the current language is, that each bowl has a value 
of fifty cents. Why has it a value of fifty cents ? 
Clearly enough, to reward his service who felled the 
tree, and sawed the block, and then hollowed out the 
bowl. But the service having been employed upon 
the matter, and being embodied in it, is not what is 
really sold now the matter, and not the service ? I 
answer, No. What is really sold is the service, and 
not the matter. And this, which at first sight might 
not be thought important, but which is really very im- 
portant, becomes apparent as soon as we reflect that 
any changes in the conditions of the service instantly 
affect the value. Our woodman has on hand a stock 
of one hundred bowls, which he offers for sale at 
fifty cents apiece, as fairly rewarding his personal 
services in their production. But, unknown to him, 
an enterprising neighbor has invented a machine 
which enables him to make bowls in every respect 
equal to the others, and to offer them at twenty-five 
cents apiece. Whoever now wants a wooden bowl 
can have that service rendered him for twenty-five 
cents return. The first man finds that he cannot 



68 ELEMENTS OF POLITICAL ECONOMY. 

sell a bowl for over twenty-five cents, and that his 
stock of one hundred has sunk at once in value from 
fifty dollars to twenty - five dollars. What is the 
matter with his bowls ? The matter is not in the 
matter. The matter is all there, and the form of 
the matter is all there, but the value is just one half 
escaped, because the service which he can render to 
a buyer by a bowl has been, by the enterprise of his 
neighbor, just one half lessened. Value then follows 
the fortunes of services, and varies as they vary, just 
as much when they have been employed upon com- 
modities, as when they are independent of them, 
and we see that the value resides in services com- 
pared, and not in matter at all. 

I now proceed to indicate the manner in which 
language came to be used in such a way as gives 
color to the notion that value resides in the com- 
modities rather than in the services. An instance 
will bring the whole subject before us clearly. In 
many parts of the United States delicious wild 
strawberries may be had in their season for the 
simple picking. The pastures and meadows are 
open to every comer, and the strawberries are con- 
sidered to belong, not to the owners of the fields, 
but to any one who takes the labor of picking the 
fruit. Let us suppose that my family are fond of 
the berries, and that no member of it likes to un- 
dergo the labor of picking them, and that I hire 
some girl, who offers her services for the purpose, 
to go to the fields and gather some of the fruit for 
us. When she returns I pay her for her service. 
She does not conceive of any value residing in the 
strawberries themselves. Neither do I. She makes 



ON VALUE. 69 

a series of efforts for the gratification of my family, 
and is paid for her efforts. Language recognizes 
the true state of the case, and she does not say now 
that she sells us the berries, and we do not speak of 
buying' the berries of her. She thinks only of her 
service, we think only of her service, she is paid only 
for her service : language is exact in the premises. 
The next day, as the girl is about to go for us again, 
my neighbor says to her, " You bring me as many, 
and I will pay you as much." The third day, a 
second neighbor makes a similar bargain with her, 
and she brings strawberries for the three families, 
and is paid in each case for her service. The girl, 
on the fourth day, taking it for granted that we shall 
be likely to want strawberries that day also, does not 
wait to be sent, makes no bargain for her services 
beforehand, but goes and gathers the fruit. This 
time there is a change of language when she comes 
to my door. She now offers to sell me strawberries. 
" How much are they worth ? " I ask. She names 
probably the same sum which she had before re- 
ceived for the service of picking the same quantity. 
She could not materially increase it, because there 
are doubtless other girls who are ready to render the 
service which she before rendered, at the same rate. 
But attention is now drawn away from the service 
to the berries, and the idea of value is attached to 
the berries, and language adopts the illusion, and 
says, " the berries are worth so much." Who does 
not see, however, that the transaction is substantially 
the same as before? Who does not see that it is 
o;-ly by a figure. of speech, convenient indeed, but 
> iii only a figure, 1hat the berries are now said to 



70 ELEMENTS OF POLITICAL ECONOMY. 

have value ? If there be no difference iu the last 
case as compared with the former cases in the two 
desires and in the two efforts, it is plain to reason 
that there can be no difference in the value, and con- 
sequently no difference in that which is really sold. 
But my desire for the berries, my effort as represented 
in the price paid, her desire for the money, and her 
effort as represented in the picking, are all just as be- 
fore. She expected me to take them, and I took 
them as before. The value, therefore, the purchas- 
ing-power, resides not in the berries, but in the ser- 
vice ; that is to say, in that which she renders as 
compared with that she receives; and it is only a 
freak of language which leads us to suppose other- 
wise. This is but a simple instance, but the princi- 
ples of the instance are applicable to all commodities 
whatsoever. It is only mediately and figuratively 
that commodities can be said to have value at all; 
and if we use the common language, and say that 
they have value, we must always remember that 
they have it simply and solely in consequence of the 
human services which have been employed upon 
them, and which may be subserved by them, as 
related to those other human services for which they 
may be exchanged. If this be true, and it seems to 
me certain that it is true, it throws a flood of light 
upon the whole field of value. More attention must 
be given hereafter, in Political Economy, to persons, 
and less to things. Man and his wants, man and 
his efforts, become at once the chief topics, while 
the material products on which efforts are employed, 
and which minister to wants, sink in relative posi- 
tion. It follows also from this distinction, that there 



ON VALUE. 71 

is not so much difference as is commonly supposed, 
when a man works for others, and when he sets up 
for himself, — between a journeyman and a master. 
The journeyman sells his services, and the master 
sells nothing more or other than his own services. 
The services of the master may not be manual, they 
may be merely supervisory, or they may be con- 
nected with the use of his capital; but the finished 
product, when it is ready for the consumer, repre- 
sents the aggregate of the human services which 
have been employed upon it, and whoever sells it, 
sells those services, and its ultimate value is deter- 
mined, as all other value is, by a double comparison, 
the purchaser's comparison of the service of the 
product to film with that which he renders, and the 
seller's comparison of the service he receives with 
that of the product. Service for service, in the last 
analysis, rather than commodity for commodity, is 
the rule of value and the law of exchange. 

It may be observed, in the fourth place, that a 
principal merit of the definition of value insisted on 
in this chapter, is the discrimination which it allows 
between utility and value. It is absolutely essential 
that these two ideas be not confounded. But they 
are confounded in all the earlier writers on wealth. 
The word wealth itself inextricably confounds them. 
Whole discussions in Adam Smith are marred by 
his not consistently attending to the distinction, 
which he himself draws in one place, between 
" value in use and value in exchange : " meaning 
by the former expression simple utility. Say mixes 
up the two ideas even more completely than Adam 
Smith does ; and the errors of the two writers in this 



72 ELEMn-NTS OF POLITICAL ECONOMY. 

respect gave rise to the twentieth chapter of Mr. 
Ricardo's book,^ in which the difference between 
utility and value is pretty clearly unfolded. Mr. 
McCulloch, too, always insists upon this difference, 
and correctly maintains that the distinguishing char- 
acteristic of utility is, that it is gratuitous; although 
the theory of value of each of these writers is too 
narrow, unduly restricting the field of Political Econ- 
omy by assuming that value rigidly inheres in com- 
modities only. The example of these writers shows 
that the distinction referred to can be made even un- 
der their definition of value, but it is not so easily and 
practically made as under the true definition, because 
in the true definition attention is inevitably drawn to 
two persons, instead of to one thing, and utility, which 
is simple capacity to gratify any desire, is neatly dis- 
criminated, even in the nomenclature itself, from the 
mutual efforts by which the mutual desires are met. 
The word service enables us to draw the distinction, 
and to hold it fast. 

Utility, then, is the capacity which any thing or 
any service has to gratify any human desire whatso- 
ever. Political Economy has nothing to do with 
the estimation in which different desires are held by 
a philosopher or a moralist. It is enough to consti- 
tute for it utility, if anything will meet anybody's 
desire or serve anybody's purpose. In this sense, 
which is the etymological and only just sense of the 
word, ardent spirits have utility just as wheat has 
utility. The same thing may have no utility for 
one man, a low utility for another, and a very high 
utility for a third ; since the first has no desire for it, 

1 Principles cf Political Ecdnomy and Taxation. 



ON VALUE. 73 

the second a feeble, and the third a strong desire for 
it. Desires are personal to individuals. There is 
no common standard with which they may be com- 
pared. They are not exchangeable. Utility is the 
capacity which anything has of meeting any one of 
these desires at anytime or in any place. But some 
things have this capacity in a high degree which 
are never exchanged, which are never bought or sold, 
and which consequently can have no value. The 
air we breathe, the light in which we recreate our- 
selves, the water we drink from the spring or brook, 
all have the highest utility, but no value. They 
connect themselves with no service. We give noth- 
ing for them. They, and such as they, are the 
direct gifts of God. They are gratuitous. 

But utility is always present in all value also, 
since it is an element in all service ; and the utility 
that appears in connection with value is always de- 
rived partly from Nature and partly from man. It is 
impossible to say, in any given case, how much is 
attributable to Nature and how much is attributa- 
ble to man. It might seem at first sight, as if, 
in the case of the diamond, or in the case of the 
strawberries, the utility were wholly the gift of Na- 
ture, but the diamond undiscovered among the 
pebbles, and the strawberries unpicked upon the 
meadows, can hardly be said to have utility, much 
less value. The human service that fits each of 
these to meet a present desire is an essential contribu- 
tor to their utility. On the other hand it might seem 
as if the utility of a painting were wholly referable 
to the art of the painter ; but the tenacity of the can- 
vas, the flexibility of the brush, and the brilliancy of 



74 ELEMENTS OF POLITICAL ECONOMY. 

the colors, are the contribution of Nature. Although, 
therefore, all utility that ever appears in connection 
with value is partly due to the efforts of men, it is 
none the less essential to clear thinking in this de- 
partment to separate distinctly in the mind the utility 
from the value. The utility of a service may be 
great and its value little ; the utility of a service may 
be great and its value also great. They are distinct 
things. They become, as it vi^ere, commingled in the 
service rendered, but the utility is one thing, and the 
value a distinct thing. Utility is ultimate : value is 
mediate. Utility is absolute with reference to the 
individual: value is always relative. The utility in- 
volved in every valuable service is derived from two 
sources, — the free contribution of Nature, and the 
onerous contribution of man ; but the value of such 
services in general tends perpetually to become pro- 
portionate to the onerous human contribution, and 
not to the aggregate utility. If the service be unique, 
if only one person or a few be in a position to render 
it, no useful principle can be laid down, which shall 
discriminate the two components of the utility ; but 
in respect to the vast mass of services, of which a 
market rate can be predicated, it is very clear that the 
competition with each other of those who are ready 
to render them, will fix the current value at a point 
which shall just about compensate for the onerous 
elements involved. That portion of the utility which 
is the free gift of Nature will be very nearly a com- 
mon factor in that whole set of services. The action 
of competition will eliminate this common factor, 
and tend constantly to determine value on the basis 
merely of what man has done to impart utility to 



ON VALUE. 75 

those services. Thus, if ten men bring ten horses to 
the market to exchange against money, though the 
utility of the horses be derived in large degree from 
the free gifts of Nature, yet there are some of the 
owners who will be willing to part with their prop- 
erty at a price that will compensate them for what 
they themselves have contributed towards that utility. 
The action of these will tend to fix the price of the 
whole ten. There is no tendency in value, then, to 
proportion itself to the aggregate utility of a service, 
but there is a- tendency in value to proportion itself 
to the aggregate of the onerous human efforts repre- 
sented in a service. 

This principle, which I deem important, perfectly 
accounts for the low value of many services, which 
may be said nevertheless to have a high utility. The 
girl brings delicious strawberries to my door in sum- 
mer. Their utility is great, their capacity to gratify 
my palate and that of my family is exquisite, but 
her effort in picking and bringing them is relatively 
little, and therefore it is little that I pay her. She 
cannot charge me one farthing for all that has been 
done for the fruit in the wonderful laboratory of Na- 
ture. Should she attempt to do so, there are doubt- 
less other girls willing to bring me the fruit for a fair 
equivalent for their personal efforts only. Utility 
and value, then, are different things ; we must cer- 
tainly believe this, when we see some things, as air, 
possessed of the very highest utility and no value at 
all ; and other things, as strawberries, possessed of a 
high utility and a low value. 

The history of economy is full to a surfeit of the 
theoretical errors and of the practical blunders which 



76 ELEMENTS OF POLITICAL ECONOMY. 

have come from confounding value with utility ; and 
from not attending to the fact that all utility, until 
some human service has been mingled with it, is 
absolutely free. God is a Giver. He gives sunlight, 
and au'j and water, in abundance. He gives the , 
earth, with all its materials, and with all its powers, 
and with all its spontaneous fruits, gratuitously to 
man. At the very first. He gave to man, " dominion 
over the fish of the seas, and over the fowl of the 
air, and over every living thing that moveth on the 
earth." So far forth as these gifts minister directly 
to men's wants, there is utility indeed, but no value. 
But since, for the most part, human services are 
required to mould these gratuitous materials, to har- 
ness these gratuitous powers, to make these gratui- 
tous fruits and animals available for use, and since 
services for this purpose are exchanged among men, 
value springs up in connection with these utilities, 
but must not be confounded with them. The utili- 
ties, disengaged from the service, are free. God 
never takes pay for anything, and has not author- 
ized anybody to take pay in his behalf; what is paid 
for is the service of man, and not the bounty of 
Nature. Even the powers of Nature which men 
avail themselves of by machinery, such as water, 
wind, and steam, all work for nothing: water gravi- 
tates, and wind blows, and steam putFs, for nothing. 
These all, and such as these, help to create utilities, 
but ultimately no value. Value is in the service 
which makes the machine, and in the service which 
tends it, but in the power which moves it, unless 
that power be human muscle, there is no value. 
Value must be carefully distinguished from Price. 



ON VALUE. 77 

The price of anything is its purchasing-power ex- 
pressed in money ; the value of anything is its pur- 
chasing-power expressed in any other purchasing- 
power whatever. Price is a relative word, but spe- 
cific ; value is a relative word, but general. When 
we speak of the price of a service, we mean the 
sum of money which that service will buy ; but 
when we speak of the value of a service, we mean 
the command in exchange of that service over other 
services generally. Thus, we say, " This coat is 
worth twenty-five dollars;" that is its price. The 
value of the same coat never could be completely 
expressed, because it would require a comparison not 
only with hats and gloves and boots and vests, but 
with all other things which are ever exposed for sale. 
Therefore, for convenience' sake, value is commonly 
reduced to price. By knowing the price of various 
things, we readily compare their value relatively to 
each other. Thus, when we know the price of the 
coat at 25 dollars, and of gloves at 2, of hats at 5, 
and vests at 10 dollars, we easily determine the 
value of the coat as estimated in gloves, hats, and 
vests, namely, that its value as compared with theirs, 
is respectively 12-^, 5, and 2| times theirs. The value 
of anything may remain nearly uniform while its 
price may greatly vary. At the present writing 
(1868), the prices of almost all commodities are 
much above the usual rate, because the currency 
of the country is exchanging against gold at 145 
for 100; but the value of these commodities, that 
is to say, their power of purchasing each other, is 
just about as it was before the depreciation be- 
gan. All other commodities have risen in relation 



78 ELEMENTS OF POLITICAL ECONOMY. 

to the one commodity, money; or, which is the same 
thing, money has fallen in purchasing-power in rela- 
tion to all other commodities ; and there is in conse- 
quence a universal rise of prices; but it would be a 
total mistake to suppose that values have risen. A 
bushel of corn, now selling at 1^ dollars, will buy 
no more labor, or hay, or cloth, than it used to buy 
when it sold for one dollar a bushel ; because the 
labor, hay, and cloth have risen in relation to money 
in the same proportion as the corn has ; while in re- 
lation to each other no changes have supervened. 
Services and commodities, with few exceptions, ex- 
change with one another at the old rates, — value 
is unaltered ; but exchange for money at much 
above the old rates, — prices have risen. More- 
over it is not possible that there should be any gen- 
eral rise or fall of values, as there may be a general 
rise or fall of prices. A rise in the value of anything 
implies a fall in the value of those things with which 
you compare it; that is to say, if it will buy more 
of them, they will buy less of it. Its rise in value im- 
plies their fall in value, and conversely. Every rise 
in value of any service involves a corresponding fall 
in other services ; and every fall in value of any 
service involves a rise in value of other services; 
and therefore, a general rise or fall of values is im- 
possible. Nothing is more common than a rise or 
fall of value in particular services. Suppose, for 
instance, an improvement in machinery by which 
broadcloth can be made with one half the former 
eftbrt, and that no change has been made in the 
efforts requisite to make the gloves, hats, and vests 
of our former example, and no change in the views 



ON VALUE. 79 

of those who wish to exchange them. The coat 
will sink at once to about half its former value, not 
only in relation to gloves, hats, and vests, but in re- 
lation to everything which does not happen to be 
affected by a similar depressing cause. It is cor- 
rect to say that the value of the coat has fallen. As 
estimated in gloves, hats, and vests, its value now is 
only 61, 2^, and 1-^ times theirs, respectively. But 
while coats have fallen in relation to the other com- 
modities, the other commodities have risen in rela- 
tion to coats ; and if similar improvements should 
be made in the machinery by viAhich gloves, hats, 
and vests are made, so that one half less effort will 
bring these also to market, views of parties as before 
remaining unchanged, they will exchange now for 
coats exactly in the same ratios as at first, namely, 
12|^, 5, and 2i, respectively, for 1. As soon as the 
improvements affect all the commodities equally, 
value stands just as it did before the first improve- 
ment was made. Views of the parties remaining 
the same, it is only an advantage or disadvantage 
affecting some services and not others, that will 
vary their value in exchange : whatever affects them 
all equally will have no effect upon value. Thus, a 
universal rise of wages in any country, provided they 
rise in all departments of effort equally, will have 
not the least effect upon value ; and we have just 
seen that a universal rise of prices at present ex- 
perienced in this ' country, has no effect whatever 
upon the general purchasing-power of services in 
exchange, but is only a token that the one com- 
modity, money, has fallen relatively to them. 

It only remains in this elementary discussion of 



80 ELEMENTS OF POLITICAL ECONOMY. 

value to inquire whether there is, or can be, any 
measure of value — any standard, by a comparison 
with which we may determine the general purchas- 
ing-power of different services. It has commonly 
been supposed that there is such a measure, and 
political economists have expended a great deal of 
strength in endeavoring to discover what it is. The 
results have hardly been commensurate with the 
zeal and patience of the search. Adam Smith 
seems at one time to regard labor as the best meas- 
ure of value, that is, the quantity of labor which any 
commodity will buy as the best gauge of its power 
to buy commodities in general. At another time he 
seems to think that corn is abetter measure of general 
exchange value than labor. Others have thought 
that price furnished the best attainable standard of 
comparison ; in other words, that the quantity of 
gold or silver which anything will purchase, will best 
enable us to determine the quantity of all other 
things which it will purchase. Others still have 
supposed that the cost of production of any com- 
modity would give the most accurate rule by which to 
decide the value of the commodity, that is, the degree 
of its command over purchasable articles generally. 
But the truth is, a measure of value in the sense in 
which it has been sought after by these writers, is 
something impossible to be realized. It never would 
have been sought after, unless value had been sup- 
posed to be a rigid quality inhering in commodities, 
and, when once placed in them by whatever process, 
to be invariable. We have seen, however, that value 
is not a quality inhering in any one thing, but is 
a relation subsisting between two services which 



ON VALUE. 81 

two persons are in a position to render to each other; 
and that this is not an inflexible relation, but is vari- 
able by any change in the views of the two persons, 
by which either of them puts a different estimate 
upon the service about to be rendered as compared 
with the service about to be received. We have 
seen sufficiently already, that there are four things, 
and only four, any change in any^ one of which will 
vary value ; and that these four things are two de- 
sires and two efforts, the two desires belonging to 
two persons, and the efforts made by two persons 
each for the other. Now these four elements are in 
their very nature so liable to vary, and as a matter 
of fact do so constantly vary, that no man who 
clearly perceives what value is, will waste time and 
ingenuity in searching for an invariable standard of 
that which in its nature is variable and relative. 

But while no reliable measure of value is possible 
to be found, there are certain limitations and princi- 
ples of much importance which ought to be given 
in this connection. Since the foundation of value 
lies partly in the effort made by the person serving, 
and partly in the effort saved to the person served, 
and since in every exchange each of the parties is 
reciprocally serving and served, the outermost lim- 
itations of value are easily seen. A and B will not 
exchange services, unless the effort which each ren- 
ders to the other is less onerous than the effort which 
each would have to make if each served himself di- 
rectly. It costs a certain effort for me to bring water 
from the spring; I am willing to pay a neighbor for 
bringing it for me, but I should not be willing to 
make a greater effort for him in return than the ef- 



82 ELEMENTS OF POLITICAL ECONOMY. 

fort is to bring it myself ; neither should I be willing 
to make an eifort for him which I regarded just as 
onerous as the bringing the water: unless there is 
some service which he will accept less onerous to 
me than that, I shall continue to bring the water for 
myself. On the other hand, he will not render the 
service to me of bringing the water, unless it be less 
onerous to him than the doing that for himself which 
I am ready to do for him. This principle, applica- 
ble to all exchanges whatsoever, draws on the one 
side the outermost line, beyond which value never 
can pass. It may be asserted with confidence that 
no man will ever knowingly make a greater effort to 
satisfy a desire through excliange, than the effort 
needful to satisfy it without >an exchange. More- 
over, within this outermost limitation which is made 
by the comparative onerousness of the respective ef- 
forts, there is a second limitation of a similar kind. 
To pursue the same illustration, while I should 
never make an effort for another in return for his 
bringing the water, greater than that required to 
bring it myself, the return effort may be very much 
less than that effort, and may sink down to a point, 
below which .1 can get no one to bring the water 
for me. Suppose I estimate the effort required to 
bring the water myself as 10 ; and that there are 
several persons who would be glad to do that service 
for me for a return service which I estimate as 8 ; 
and that there are two persons who are willing to 
do it for something which I estimate as 6 ; and that 
there is only one person who will do it for a return 
service which I regard as 5. It is evident that the 
extreme limits of the value of that service to me are 



ON VALUE. 83 

10 and 5. Higher than 10 it cannot go, lower than 
5 it cannot sink. I should render the service esti- 
mated as 8j rather than forego having the water 
brought for me ; but I shall render the service esti- 
mated as O, just as long as there is any one person 
who will make the exchange with me on those terms. 
If he declines the exchange, I fall back on one of 
the two persons in the class above him, and value 
rises now from 5 to 6. It will be steadier at 6 than 
it was at 5, because there are two persons ready to 
render the service at that rate. If each, however, in 
turn should give out, I should then be obliged to fall 
back upon the larger class ready to serve me for a 
return service of 8. At this point the value would 
be very steady from the presence of numerous com- 
petitors anxious to serve me at that rate, and it 
could by no possibility rise above 10. Between 10 
and 5 the value may fluctuate, but it cannot over- 
pass these limits in either direction. Therefore we 
may say that the maximum value of any service in 
exchange is struck at the point where the recipient 
will prefer to serve himself, rather than make the ex- 
change ; and the minimum value of any service in 
exchange is struck at the point below which the re- 
cipient cannot get himself served. These two limits, 
it will be observed, are found in the two elements 
which we have called efforts. 

But there are also limitations of value in the two 
elements which we have called desires. In the fore- 
going illustration, it is supposed that my desire for 
the water is all the while of uniform strength, and 
the desire of each of the three classes willing to serve 
me for the return service is uniform a]^o, though 



84 ELEMENTS OF POLITICAL ECONOMY. 

each class makes a different estimate of the compar- 
ative efforts. Let us now suppose that the efforts 
on either side remain invariable, but there is a 
change in the element of desire. Any capacity in 
anything to gratify any desire of anybody is utility. 
For simplicity's sake, let us look only to the one 
man who was ready to bring the water for a return 
service which I estimated as 5, and suppose that he 
is the only man who will do me the service on any 
terms. Let now the utility of the water to me be 
increased, and let him know that fact, all other ele- 
ments remaining as before, and he can crowd up 
the value of his service towards 10, according to the 
intensity of my desire. Of course he cannot crowd 
it over 10, but the limit below that will now be de- 
termined by the relative strength of my desire. On 
the other hand, if my desire be as before, and the 
two efforts as before, and his desire for my return 
service be increased, and I know it, and I the only 
man who can render him such a service, I can crowd 
down the value of his service below 5, according to 
the intensity of his desire. Of course I cannot 
crowd it down below a point, which we will call 3, 
at which, rather than continue his service at that 
rate, he will forego the exchange altogether. But 
value may vary between these limits, 10 and 3, ac- 
cording to the varying intensity of our mutual de- 
sires. If it should so happen that both these desires, 
my desire for his service and his desire for mine, 
should increase simultaneously and proportionably, 
value would not be affected ; the exchange would go 
on at the same rate as before. Or if both desires 
should diminish simultaneously and proportionably, 



ON VALUE. 85 

value would not be affected. The same is true of 
efforts. If both efforts suddenly become twice as 
onerous, or one half as onerous as before, the de- 
sires remaining the same, the value of the two ser- 
vices estimated in each other would stand just as 
before. Thus we see th^t the natural limits of value, 
and all the variations in value, are to be sought for 
and will be found in the play and interaction of the 
four elements out of which value itself springs. 

We shall now be able to understand clearly what 
is meant by Market- Value and its variations, and 
also the action of Supply and Demand. Market- 
Value is the rate at which services of all sorts are 
exchanging at the present time in the various de- 
partments of society. What determines that rate ? 
What determines that corn is now selling in the 
market for 1^ dollars a bushel ? Two desires 
come in to determine it, — the desire of people for 
corn, and the desire of farmers for money. Two ef- 
forts come in to determine it, — the effort of farmers 
to raise and bring a bushel of corn to market, and 
the effort of people to secure 1^ dollars in money. 
The presence of corn in the market, or its being 
ready to be immediately brought there and offered 
in exchange for money, constitutes what is called a 
Supply of corn ; money offered, or ready to be of- 
fered, in exchange for corn, constitutes what is called 
a Demand. This is commercial language, and is 
sufficiently accurate, although it must be remem- 
bered that each commodity in reality constitutes a 
Demand for the other, and is a Supply in reference to 
the other. But, speaking commercially, the money 
ready to be offered for commodities is the Demand, 



86 ELEMENTS OF POLITICAL ECONOMY. 

and the commodities r'^ady to be exchanged for 
money are the Supply. What, then, is the law of 
market-value? The law of market-value is the 
equation of supply and demand : that is to say, the 
rate of the exchange is adjusted when money enough 
is offered to take off within the usual times the 
commodities on hand. Demand and supply are 
thus equalized, and the current market-rate is deter- 
mined. If demand for any reason becomes quick- 
ened, and the supply not increased, there is compe- 
tition among buyers for the stock in market, and 
market-value tends to rise. If demand becomes 
sluggish, the supply remaining the same, there is 
competition among sellers to dispose of their stock, 
and market-value tends to sink. So far it is the 
action on value of the element of desire, which ex- 
presses itself through demand. How far can this 
action go ? Demand being increased, supply re- 
maining the same, value rises : how far does it 
rise? In the ratio of the increased demand, say 
some ; if the demand be one third increased, the 
value will be one third higher. By no means is this 
true. The value may rise far higher than that pro- 
portion, or it may not rise in anything like that pro- 
portion. It depends upon circumstdinces, and upon 
the nature of the commodity. We must remem- 
ber that demand not only acts upon value, but value 
•acts upon demand. As value rises, the number of 
those whose means or inclinations enable them to 
purchase at the new rate is constantly diminished. 
There are ten persons who may wish an article at 
one dollar, of whom not over four \^ill wish it at 
two dollars, and perhaps only one at three dollars. 



ON VALUE. 87 

Every rise in value then, under the influence of in- 
creased demand, tends to cut off a part of that de- 
mand, that is, to lessen the number of those who 
will purchase at the increased price ; and the value 
will rise only to that point, whatever it be, where an 
equalization takes place between the supply and de- 
mand, between the quantity of corn, for example, 
offered at the enhanced rates, and the quantity of 
money in the hands of those willing to exchange it 
for corn at the enhanced rates. Thus we see that 
every rise or fall of demand, and the consequent 
rise or fall of value, tends to check itself. An in- 
creased demand for any article or service, other 
things being equal, enhances its value ; but the en- 
hanced value in turn lessens the demand by lessen- 
ing the number of those who will purchase, and the 
new market-rate is struck at the point of equaliza- 
tion between the old supply and the new demand. 
Just so, if demand is slackened, value declines; but 
declining value in turn increases the demand by 
bringing the article within the range of a larger 
number of purchasers, and the decline is arrested at 
the point of equalization between the new demand 
and the old supply, and a new market-rate is deter- 
mined. Everything oscillates under the variations 
of demand, but the point of stable equilibrium, if I 
may use the expression of anything so unstable as 
market-value, the point of stable equilibrium is 
always the equation of supply and demand. 

In the preceding paragraph we have supposed 
supply to remain unchanged, and have followed the 
law of value through the variations of demand, 
which, money being invariable, as is here supposed, 



88 ELEMENTS OF POLITICAL ECONOMY. 

expresses the element of desire. Supply expresses 
the element of efforts, and market-value varies with 
the variations of supply. We have seen that every 
rise or fall of demand tends to check itself, and will 
check itself even without variations in the supply ; 
but it is commonly checked at an earlier point by 
variations in the supply. A brisk demand enhances 
value, and enhanced value commonly stimulates sup- 
ply, and increased supply checks the rise. A slack 
demand lowers value, and lowered value commonly 
lessens the supply by the action of holders and spec- 
ulators, — holders withdrawing their stock for a bet- 
ter market, and speculators buying now when the 
article is cheap, to store away till it shall be dearer. 
Thus rise of value from increased demand is doubly 
checked ; first, by restricting the number of purchas- 
ers, and second, by increasing the supply : the fall 
of value from slack demand is doubly checked; 
first, by enlarging the number of consumers of a 
now cheaper article, and second, by diminution of 
supply by the action of holders and speculators. 
This law of the equalization of demand and supply, 
thus doubly and harmoniously working, is perhaps 
the most comprehensive and beautiful law in politi- 
cal economy. But we must note the action on value 
of changes in supply only, demand continuing 
steady. If the supply be short, and cannot be in- 
creased at all, as is the case with choice antiques and 
certain gems and paintings by the old masters, value 
may rise to any point, and will be struck, as before, 
at the precise point of equality of the demand then 
existing with the supply there offered. The French 
government paid, in 1852, 615,300 francs for a paint- 



ON VALUE. 89 

ing by Murillo, which had belonged to Marshal 
Soult. The genuine Murillos are comparatively 
few, and their number cannot be increased, and 
their merit causes a strong desire to possess them, 
and their value rises in consequence of the limita- 
tion of supply to a point beyond which no one pur- 
chaser can be found. When this painting was 
offered in Paris for sale, many parties were anxious 
to purchase it, but the equation of demand and sup- 
ply was reached, and its value was determined only 
when one party distanced all other competitors 
and offered a sum greater than any one else would 
give. There was one painting; there could be but 
one purchaser ; value rose under the influence of 
demand, and could not be checked by increase of 
supply ; and the equation was complete when the 
demand was practically restricted to one party, and 
that the highest bidder. The same principle controls 
all sales of this sort. 

If the supply, instead of being absolutely limited, 
can only be increased with difficulty, or after the 
lapse of time, similar but less extreme results will be 
observed. Suppose pianos are selling in any com- 
munity at $300 each, and there are twenty persons 
in that community who wish a piano immediately, 
and that there are but fifteen pianos on hand, and the 
number cannot be increased for six months. The 
value will rise above |300. How much above ? To 
that point, v/hatever, it be, at which only fifteen of 
the twenty will be willing to purchase at the new 
rate. The equation of supply and demand wilt be 
reached by a rising value which cuts off" five com- 
petitors. This is the principle, working only roughly 



90 ELEMENTS OF POLITICAL ECONOMY.' 

indeed in practice, — working only by the estimates 
and good judgment of dealers, — but the principle 
is this. A better illustration of this class of cases is, 
perhaps, the grains and other products of the earth. 
When these have been gathered there is no more 
home supply for a year. Any deficiency in the 
crops will raise their value, not at all in the ratio of 
the deficiency, but according to the relations of the 
diminished supply to a new demand. It will de- 
pend on the facility of importation, and other causes, 
but it has frequently happened that an estimated de- 
ficiency of crops amounting to one third has doubled 
and even quadrupled the usual prices.'- 

In the only remaining, and far more numerous 
class of cases, in which the supply of commodities 
and services can be readily and indefinitely increased, 
every rise and fall of value is speedily checked by 
the action of supply ; and the comprehensive and 
harmonious law already referred to keeps value in 
this class of cases comparatively steady. 

The general theory of value has now been given. 
While we shall find no case of value, or its varia- 
tions, which this theory does not cover and explain, 
we shall find particular principles which act in cer- 
tain cases upon demand and supply, and thereby act 
upon value. We have now seen what value is ; how 
it arises; the elements which alone can vary it; and 
the universal law which limits it. 

1 Tooke's History of Prices. Quoted by J. S. Mill. 



ON EXCHANGE. 91 



CHAPTER IV. 

ON EXCHANGE. 

The strength and safety of our conclusions in 
Political Economy are derived from the simplicity 
and certainty of the forces at work. No man has 
ever denied the great facts that lie at the basis of 
exchange. That men are possessed of desires, that 
efforts are necessary in order to meet these, and that 
satisfactions are the result, are propositions univer- 
sally admitted. From these simple truths spring all 
the laws of our science. Efforts are exchangeable. 
One man may and does put forth the effort neces- 
sary for the satisfaction of another man's desire. 
But since the effort is not for himself but for another, 
and since to put forth efforts is not naturally agreea- 
ble to man, and never becomes so, except* in con- 
nection with the satisfaction to which they minister, 
he will demand for his effort some corresponding 
effort made for him. This is a simple fact. No 
man will work for you for nothing. If you think he 
ought to do so, there is no law against your trying 
to induce him to do so. « 



92 ELEMENTS OF FOUTICAL ECONOMY. 

How now does it happen that society is one vast 
hive of buyers and sellers, every man bringing some, 
thing to the market and carrying something off? We 
speak of the commercial classes, but all classes are 
commercial. Everybody exchanges. You do some- 
thing for me, and I will do something for you, is the 
fundamental law of society. From this results the 
division of employments, and all the various profes- 
sions. Every man brings his own product and ex- 
changes with society as best he may. The farmer 
brings his produce — and exchanges. The mechanic 
brings the product of his skilled labor — and ex- 
changes. The laborer brings his strength, and the 
teacher his knowledge, and they are ready to do ser- 
vice — for a consideration. The merchant, the phy- 
sician, the lawyer, the clergyman, the editor, the 
lecturer, the singer, the actor, and so on to the end 
of the list, are ail in position to render services to 
society, and justly expect to receive an equivalent 
service in return. Indeed, when we look out upon 
society, the most striking thing we observe about it 
is, that these exchanges are going on, in a thousand 
directions at once, determining all employment and 
professions, reaching everywhere and permeating 
everything, and all this the more rapidly and per- 
fectly as knowledge and civilization advance. Since, 
therefore, as a matter of fact, men do constantly put 
forth onerous efforts to satisfy other men's desires, 
in order to receive back from them the results of cor- 
responding efforts in return ; since this mutual ex- 
change of services is everywhere present in society, 
not in the market-places only, but in every depart- 
ment of life, there must be in this exchange some 



ON EXCHANGE. 93 

great gain. We now inquire particularly what this 
gain is. What is the motive that leads men univer- 
sally to exchange? 

The answer to these questions will bring us to the 
gratifying conclusion that the laws of exchange are 
based on nothing less solid than the will of God. 
The desires of men are not only various in kind and 
indefinite in degree, but also tend to increase in 
variety and extent by the progress of knowledge and 
freedom. To the gratification of almost all these 
desires, however, there are obstacles interposed, some 
of which are physical and some moral ; and these 
obstacles are so great in all directions, that the pow- 
ers of the individual man are utterly incompetent to 
surmount them. They mock at his weakness, and 
throw him back upon his destitution. Without 
association with his fellow-men, there is no creature 
so helpless, so unable to reach his true end, as is 
man ; and therefore it is, that the impulse to associ- 
ation is one of the strongest of our natural impulses. 
Men come together, as it were by instinct, into soci- 
ety ; and, associating themselves together in a soci- 
ety, it is very soon discovered, not only that there 
are various desires in the different members of the 
community which are now readily met by coopera- 
tion and mutual exchange, but also that there are 
very different powers in the different individuals in 
relation to those obstacles which are to be sur- 
mounted. There is a vast diversity in natural gifts. 
One man has physical strength, with no mechanical 
ingenuity ; another combines with a feeble body a 
wonderful knack for contrivance ; a third has a 
pliilosophical turn, liking to examine into the laws 



94 ELEMENTS OF POLITICAL ECONOMY. 

of nature ; and a fourth has a bent and genius for 
traffic. Now, then, Nature speaks in this diversity 
of gifts in as loud a voice as she can utter, in favor 
of such a degree of association and exchange as shall 
allow a free development of these varying capacities, 
while they work upon the obstacles to the gratifica- 
tion of men's wants which are appropriately oppo- 
site to them. Mr. Carey is right in his principle that 
the degree of individuality depends on the degree of 
association, each advancing hand in hand with the 
other; but he seems to me to be wrong while he 
lacks confidence in the natural forces at work tending 
to the highest degree of association and consequently 
to the highest degree of individuality. There is no 
social force stronger than interest, and interest is 
driving society continually to exchange, and to a 
wider and wider application of the principles of ex- 
change, that is to say, to a higher and higher degree 
of association, which allows of cour.se a continually 
freer development of individuality. When interest 
fails as a motive power, at least in this department, 
it is vain to appeal to or to trust an inferior and fac- 
titious motive power. 

It is interest that leads men to exchange. It is 
because a given effort put forth for another, in view 
of a return, realizes more of satisfaction than when 
put forth directly for one's self, that exchange ever 
takes place. Why does it realize more ? Because 

THERE IS DIVERSITY OF ADVANTAGE BETWEEN DIF- 
FERENT MEN AND BETWEEN DIFFERENT NATIONS, IN 

DIFFERENT RESPECTS. All cxchaugc dcpcuds on 
diversity of relative advantage; and diversity of rela- 
tive advantage exists by God's appointment among 



ON EXCHANGE. 95 

Individual men, and among the nations. Reserving 
this national diversity for a later discussion, it is 
very clear that a diversity of advantage in different 
things displays itself as between the individuals of 
every community large and small. There is no 
village in which one man has not an advantage over 
his neighbors in the making of coats, another in the 
shoeing of horses, another in the curing diseases, 
another in the keeping a school ; while each of those 
neighbors may have an advantage over each of these 
in some other art or avocation. This diversity of 
advantage in various directions depends, in every 
advanced state of society, partly upon diversity of 
original gifts, partly upon concentration of personal 
effort upon the one set of obstacles that lie in the 
path of a single branch of business, and partly upon 
the use, and familiarity in the use, of the gratuitous 
forces of nature which lend their aid towards over- 
coming these obstacles. As the result of one or two 
or all of these, one man comes to have a legitimate 
advantage over others in his own branch of business, 
whatever it is ; and the others come to have a legiti- 
mate advantage over him in their own branches of 
business, whatever they are ; and if he has desires 
which their efforts can satisfy, and they desires which 
his efforts can satisfy, nothing more is necessary to 
a profitable exchange between them than this rela- 
tive advantage at different points. The tailor and 
blacksmith can profitably exchange their respective 
efforts just as soon as each has a relative superiority 
to the other in his own trade, provided of course each 
has a desire for the product of the other ; and the 
greater the relative superiority of each to the other, 



.96 ELEMENTS OF POLITICAL ECONOMY. 

the more profitable is the exchange to both. This is 
a point of considerable consequence, and will repay 
some pains in illustration. If the blacksmith can 
shoe horses only a little better than the tailor could 
shoe them, and the tailor make coats only a little 
better than the blacksmith could make them, there 
will be only a slight advantage in their mutually ex- 
changing efforts. For the sake of definiteness, let us 
say, that the tailor's capacity in making coats is 6, 
and his capacity in shoeing horses is 5 ; and the 
blacksmith's capacity in shoeing horses is 6, and his 
capacity in making coats is 5. Each has a relative 
superiority to the other of 1, and if they exchange, 
there is an advantage of 2 to be divided between 
them. Now let us suppose that each, by exclusive 
devotion to his own trade, by developing his latent 
skill and ingenuity, and by availing himself of all the 
forces of nature at his command, comes to have a 
capacity in his own business of 15, his capacity in 
the other business remaining as before at 5. Each 
now has a relative superiority to the other of 10, and 
when they exchange there is an advantage of 20 to 
be divided between them. The motive to an ex- 
change, and the gain of an exchange, are ten times 
greater than they were before. Therefore we lay 
down the principle, as universally applicable to all 
exchanges, that the greater the relative superiority 
at different points, the more profitable do exchanges 
become. If this principle is just, and I flatter myself 
that it will be found to be just, it follows, that every 
man who has anything to exchange, is directly inter- 
ested in the success of his fellow-citizens, that every 
trade finds its advantage in the increasing develop- 



ON EXCHANGE. 97 

metit of other trades, and that all discoveries and 
inventions by which Nature is made to pay tribute 
to any art is, restrictions apart, so much clear gain 
to the world at large. In the light of sound princi- 
ples, what has been sometimes called the jealousy of 
trade is simply silly. 

All exchange, then, depends on difference of rela- 
tive advantage, because without some difference of 
relative advantage, each party could serve himself 
directly just as well as he could be served by the 
other party, and there would be no motive at all for 
an exchange. As soon as there is any difference of 
relative advantage, there begins to be a motive for an 
exchange, and a gain as the result; and the motive 
and the gain become stronger and greater as the dif- 
ference increases ; so that the gains of exchange are 
the greatest in that state of society in which the 
freest opportunity is allowed to every individual to 
employ his peculiar powers in work for which he is 
best fitted, in which desires are so various and em- 
ployments so diversified as to give a chance for all 
kinds of efforts, and in which men avail themselves 
to the utmost of those natural advantages and gra- 
tuitous powers which lie open to their disposal. 
Freedom, association, and invention, are the three 
things which make exchanges as profitable as they 
can become, and which will carry society, so far as 
exchanges can do it, to the highest pitch of prosper- 
ity. Of these by far the most important is freedom, 
because, where freedom is conceded, association and 
invention follow in time bylaws of natural sequence. 
By freedom is meant the right of every man to em- 
ploy his own efforts for the gratification of his own 



98 ELEMENTS OF POLITICAL ECONOMY. 

wants, either directly or through exchange. Bach 
man's right of freedom is limited of course by every 
other man's right of freedom which he is not at lib- 
erty to infringe; and also, in certain respects, by what 
is called the general good, of which the judge must 
be the government under which he lives. Under 
these limitations, which limit in common all other 
rights, the right of exchange is just as much of a 
right as the right of breathing. It stands on the 
same unassailable ground. Every man has a nat- 
ural, self evident, and inalienable right to put forth 
efforts for his own well-being ; and whenever two 
men find that by exchanging efforts with each other, 
they can better promote their own happiness, they 
have an indisputable right, subject only to the above 
limitations, to exchange ; and it is a high-handed in- 
fringement of natural rights, a blow aimed at the 
life and source of property, when any authority 
whatever interferes to restrict or prohibit the free- 
dom of exchange, except that act be justified by a 
solid proof that other private or public rights which 
are as well based as the right of exchange are in- 
fringed thereby. 

Happily, since governments have become more 
enlightened than formerly, they perceive for the most 
part that they have no right to interfere with this nat- 
ural right of their people, and also, that, by interfer- 
ing with it, they would do them an incalculable in- 
jury. The only motive to a mutual exchange of 
services, is always and everywhere the mutual benefit 
of the parties. After every fair exchange, each party 
is richer than before, has more satisfactions, otherwise 
there would be no exchange. I esteem the service 



ON EXCHANGE. 99 

I receive more highly than the service I render, oth* 
erwise I should not render it. The man to whom 1 
render it esteems that service more highly than the 
service he renders to me. We are both gainers. 
And since almost everybody in every communit}' 
has something to exchange, — either service or com- 
modity, and nobody exchanges except in view of a 
gain, it is clear that free exchange benefits every- 
body, and harms nobody. Moreover, under a system 
of free exchange, every man is allowed, under the 
stimulus of self interest, to follow the bent of his 
own mind, to work away at those obstacles to the 
gratification of human desires which he feels him- 
self best able to overcome, and to avail himself of 
all those helps in his work, of which Nature offers to 
him a full store. Under these circumstances, obsta- 
cles give way in all directions : the amount of mate- 
rial products produced and offered for exchange is 
vastly augmented ; the number and variety and 
excellence of the services proffered is indefinitely 
increased; the diversified and rapidly increasing de- 
sires in such a community are readily met by ex- 
change ; all peculiar facilities are taken advantage of, 
and the difference of relative advantage becomes 
great in all directions, and a new day of industrial 
and commercial prosperity is ushered in. Under 
freedom all men have the greatest possible motive 
to produce, because they can dispose of their efforts 
to the best advantage. They can purchase with 
these efforts what they will, and when they will, and 
where they will. Thus freedom leads to extended 
association, and, speedily also, to the invention of 
machinery and all labor-saving appliances. There- 



100 ELEMENTS OF POLITICAL ECONOMY. 

fore, since free exchange indefinitely multiplies, in 
number and variety, the services which men may 
render to each other ; since, by means of it, men's 
satisfactions bear a larger and larger proportion to 
their efforts ; and since the only possible motive 
to an exchange is a mutual benefit of the parties, 
no reason can be given, no good reason ever has 
been given, why exchanges should not be the freest 
possible. 

-After long centuries of meddlesome and vexatious 
interference with the freedom of industry and the 
rights of exchange, by limiting the number of ap- 
prentices to each artisan, by dictating what should 
and what should not be manufactured or grown, by 
attempting to determine what should and what 
should not be imported and exported, and by arbi- 
trary burdens on certain classes, and arbitrary privi- 
leges granted to others, the more enlightened nations 
of the world have come at length to perceive that 
wealth and power and progress are dependent on 
free exchange, at least within their own boundaries. 
Common sense reigns now, for the most part, in this 
thing, within the limits of the individual nations. 
When Bonaparte brought half of Western Europe 
under French dominion, the previously existing cus- 
tom-houses and toll barriers of the interior fell as by 
a stroke, and free trade became the rule between 
French, Dutch, Germans, Italians, and Spaniards, — 
all who were subject to his sway. But when his 
vast empire was dissolved into its original independ- 
ent kingdoms, up shot the custom-houses again, 
around all the petty frontiers, and each State was 



ON EXCHANGE. lOl 

busy to reirapose on itself the fetters which his 
powerful hand had broken.^ Just as if the bene- 
fits of exchange depended on the accident that the 
parties to it are subjects or citizens of 'the same gov- 
ernment ! 

Opposed to free exchange are monopolies. A 
monopoly is a legal restriction imposed by the gov- 
ernment upon the sale of certain services or commodi- 
ties. This restriction is ostensibly laid for the bene- 
fit of certain persons or classes, and limits of course 
the competition to which they would otherwise be 
subject in their business, and tends therefore arti- 
ficially to raise the value of that which the privi- 
leged few offer for sale. If the view be limited to 
these persons alone, monopolies would certainly 
seem to be advantageous, but what of the purcha- 
sers and consumers of their wares ? They all are 
obliged to pay a higher price for what, were it not 
for the monopoly, they could obtain at a cheaper 
rate, since the only object in laying the restriction, is 
to enhance the price for the benefit of those possess- 
ing the privilege. Monopolies, therefore, infringe the 
right of exchange, are unjust and odious in their 
nature, and are in practice abominable. Nearly all 
governments have been chargeable, at times, with 
successful attempts to make things thus artificially 
dear to the mass of the people. Queen Elizabeth 
called the power of granting patents of monopoly to 
her favorites " the fairest flower of her garden." To- 
wards the close of her reign, her abuse of this power 
had reached an intolerable height, and some of the 
most necessary articles of life, such as salt, iron, 

1 Senior. Page 177. 



102 ELEMENTS OF POLITICAL ECONOMY. 

calf-skins, vinegar, lead, paper, and many others, 
were in the hands of patentees, and eoiild only be 
procured at exorbitant prices. In 1601, the House 
of Commons met in so angry and menacing a mood, 
in consequence of this abuse, that Elizabeth was 
obliged to promise at least, that the monopolies com- 
plained of should be abolished. Up to 1834, tea 
was a close monopoly in England, in the hands of 
the East India Company. To this day tobacco is a 
government monopoly in France. Salt and opium 
have been, and for aught I know still are, monop- 
olies in British India. For governments to confer 
a power of this sort on an individual, a company, 
or any set of persons so few as to enable them 
to combine, is to give them a power to levy any 
amount of taxation on the public, for their own 
especial benefit, which will not compel the public to 
forego the use of the monopolized article. Monop- 
lists, however, do not find it for their interest to 
crowd up the price beyond the reach of the mass of 
the ordinary consumers, especially if they can com- 
mand a full supply, because their aggregate income 
would be lessened by the falling off of buyers from 
the highest price. They adjust the price at that 
point at which they suppose they will realize the 
largest aggregate gains ; a price which is still con- 
siderably above what it would be under free ex- 
change ; otherwise the monopoly would be of no 
benefit to them. 

A second form of monopoly is that in which gov- 
ernments by restrictive duties try to exclude foreign 
competition in certain articles, leaving the domestic 
dealers open only to home competition. One of two 



ON EXCHANGE. 103 

things is sure to follow upon such exclusion. It 
sometimes happens the hope of extra gains from 
dealing in an article whose foreign supply is thus 
restricted, seduces capital and labor from other prof- 
itable channels and concentrates them upon this busi- 
ness; and the home competition, thus artificially 
stimulated, becomes feverish and intense, and the 
whole business is overdone, and they in whose behalf 
the restrictive duty was laid, have reason to pray to 
be delivered from their friends. Their profits for a 
time sink below the cuiTcnt rate from the eagerness 
of others to share in their expected gains; the weaker 
houses are ruined, and an element of distrust and 
unsteadiness is introduced into the whole business. 
Only the stancher firms weather the depression 
consequent upon overdoing, and they will now con- 
trol the market for a time at a monopoly price. But 
their prosperity has been purchased at too dear a 
rate ; the losses of home competitors, and of those 
who would otherwise have been foreign competi- 
tors, and of those who would have exchanged with 
those foreign competitors, but whose market is 
also cut off by the duty, overbalance many fold these 
factitious and precarious gains. This series of re- 
sults has several times been witnessed in this country 
under the stimulus of high protective duties, as, for 
instance, in the iron business after the tariff of 1842. 
More commonly, however, competition is less active 
after the foreign competitors .have been thrust off; 
those who are in fair possession of the home field 
control the markets at a monopoly price. Relieved in 
great measure from the stimulus of competition, the 
manufacturers and dealers are less on the alert for 



104 ELEMENTS OF POLITICAL ECONOMY 

improvements and inventions, they are less attentive 
and compliant to their customers, and the consumers 
are obliged, not only to pay a tax levied for the ben- 
efit of the monopolists, but also an additional tax 
on account of their want of enterprise and spirit. 
Very different in character is the third form of 
monopoly, that involved in the granting of patent- 
rights and copyrights. That the originator of an 
improved process should enjoy for a limited time the 
sole right to employ and to sell his improvement, is a 
very proper way to compensate him for the thought, 
the pains, the expense, involved in his invention. 
This mode has the merit of graduating the compen- 
sation according to the real benefits of the invention. 
The same is true of copyrights. Society does well 
in protecting by law inventors and thinkers in the 
sole use of their respective productions for a limited 
time. Otherwise men would have less motive to 
think and to invent; since in that case only the 
public spirited and the rich would or could devote 
themselves to an important branch of the public 
progress. A patent or copyright is merely a return 
service which society renders for a service received. 
It violates no man's right of property, as an ordinary 
monopoly does, but is a provision to protect a right 
of property. In the United States a patent right ex- 
tends for fourteen years, and may be in certain cases 
extended further by the Commissioner of Patents, 
or by act of Congress. A copyright extends for 
twenty-eight years, and may be renewed by the 
author, his widow, or children, for fourteen years 
longer. 



ON PKODUCTION. iQc 



CHAPTER V. 

ON PRGDUCTIO^r. 

While it is impossible to make discussions in 
Political Economy amusing, it is also impossible 
intelligently to conduct them without constant!}'' 
coming to conclusions which are most cheering. 
We shall find a gratifying law underlying the oper- 
ations of production, which demonstrates that God 
designed man to be a producer, and to produce un- 
der conditions of constantly increasing advantage. 
The world with its forces, and man with his mo- 
tives, are so admirably constructed, that these condi- 
tions of increasing advantage cannot fail, under 
freedom, to redound to the benefit of the masses of 
men. We will first determine what production is, 
and then the cheering law that underlies it. 

Every man who puts forth an effort to satisfy the 
desire of another, with the expectation of a return, 
is, in the language of Political Economy, a Pro- 
ducer. The Latin word producere means to expose 
anything to sale. Our derived word to produce means 
the same. A Product is anything thus exposed, that 
is, a service ready to be rendered. Adam Smith, who 
is sometimes called the father of this science, used 
these terms in a restricted sense, and thereby almost 
unfitted them to do their proper work. He confined 
production to the occasioning of changes in material 



106 ELEMENTS OF POLITICAL ECONOMY. 

objects. He gifted with the title of producer the 
farmer, the mechanic, the miner, the hunter, and 
fisherman, because they bring to the market a ma- 
terial commodity; and refused the honor of the term 
to those who render simple services, however essen- 
tial. This is wrong. It proceeds from an inadequate 
analysis of value. That which is produced, that with 
wjiich we have to do, is not matter but value. They 
who originate value are producers. But we have seen 
that value is not an attribute of matter, but a relation 
of services. The service may be employed upon mat- 
ter, may be embodied in it, but what is really sold is 
not the matter, but the service ; and services are all 
the time being sold, as those of the singer, the teacher, 
the clergyman, which have no connection whatever 
with matter. These services have purchasing-power, 
these persons orioinate value, and therefore, they are 
producers. Certainly, in an inventory of all values, 
a certain part would be found connected with ma- 
terial objects, but not the largest part. Our lan- 
guage must be broad enough to cover all the cases. 
Therefore, Production is the rendering of any service 
for which something is demanded in return. 

Now, then, as to the beneficent law that underlies 
it. Production is effort. But efforts are irksome, 
Is there, then, no way to lessen efforts, to make then? 
less onerous, and, at the same time, more produe 
tive ? Yes, thank God, there is! We may bring te 
our aid the gratuitous help of Nature ! The world is 
full of powers which we may employ to facilitate 
our work. For example, at first people ground their 
grain by hand ; and it was a weary, weary task to 
sit cramped at the mill all day, and turn, and turn, 



ON PRODUCTION. ' 107 

and turn.^ The effort was great, and the result was 
small. At length it occurred to somebody that the 
weight of water would turn a wheel, and that the 
wheel might turn the mill-stones. Once thought of, 
the water-wheel was soon an actual fact. Instead 
of human strength. Nature works now, and what is 
better, works for nothing! Man's service is still 
needed, he feeds the hopper, tends the bags, but he 
does not ache so badly ! Nor is this all. One day's 
labor is now vastly more productive. More grain is 
ground, bread comes easier to the poor, and the 
wheel which free water turns blesses its millions 
with a cheapened product! 

Let us take another illustration. The old hand- 
loom was the only means antiquity knew of for pro- 
curing clothing. The shuttle was thrown by human 
muscle. Every thread cost a throw. This work 
was mostly done by women. The word wife comes 
from the word to weave. The wife, then, was pri- 
marily the weaver. While the slave woman sat on 
the ground, and turned the handle of the mill to 
grind the grain, the wife was exalted to the dignity 
of the loom, and worked away at the monotonous 
task, thread by thread, thread by thread. Doubtless 
the hand-loom was a great improvement on the 
earlier processes, and was itself gradually improved 
as the centuries went by, each improvement being 
the substitution either of a gratuitous force of Na- 
ture for an irksome human effort, or an easier pro- 
cess of art for a more laborious one. Every step of 
improvement was a lessening of obstacles with refer- 
ence to a given satisfaction. All the way up to 

1 Exod. xi. 5; Isa. xl\di. 2. 



108 ELEMENTS OF POLITICAL ECONOMY. 

our present admirable machinery — the power-loom, 
which weaves, as if by magic, while a child can 
tend it — every step has marked a lessening of 
efforts relatively to utilities. The utility, the satis- 
faction, the yard of cloth, has cost less and less of 
human effort, not only to the producer, but, through 
exchange, to everybody. Accidental causes in this 
country have interrupted this progress for a little, at 
least in the case of cottons, but it will go on again 
in the good time coming. And this progress, thus 
briefly illustrated in the two cases of flour and 
cloth, has been going on, and is constantly going 
on, in all directions ; more strikingly, perhaps, in 
the production of material commodities, in which 
the powers of Nature may be indefinitely applied by 
machinery, but at the same time there are no ser- 
vices of any kind which are not facilitated in some 
degree by the progress of knowledge and experi- 
ence ; and the benefits of this increasing advantage 
come home, through exchanges, to everybody ; and, 
consequently, the satisfactions of all bear a larger 
and larger proportion to their efforts. 

This, then, is the underlying and benevolent law 
of production, that God has placed freely at men's 
disposal such materials and forces in Nature, that, 
availing themselves skilfully of these, onerous efforts 
bear a less and less proportion to realized utilities. 
Men have a strong motive to substitute, whenever 
they can, force for muscle, machinery for labor. The 
farmer who used to cut every spire of grass with a 
hand-swung scythe, then rake it up with a hand- 
drawn rake, and then pitch it into the loft with a 
handfork, now mows and rakes and pitches with a 



ON .PRODUCTION. 109 

machine. And it is a beautiful consequence of this 
law, that all improvements in machinery, all inven- 
tions, all substitution of Nature's forces for human 
labor, soon become the common property of mankind. 
Patent rights speedily expire by their own limitation, 
secret processes are sure to become known, and the 
competition of the different men who, under a system 
of freedom, will be sure to use these gratuitous helps, 
will compel each of them to sell their product at a 
rate graduated only by the actual human service 
rendered ; so that, the liberal gifts of Nature, though 
seemingly monopolized at first by ingenious men, 
are not long intercepted in their descent towards the 
masses of mankind. An invention of great merit 
even at first does not benefit the patentee alone; as 
a patentee, his interest leads him to lower the price 
of his product, to bring it within the reach of a 
wider circle of consumers; and so soon as the patent 
has expired, the benefit has at once a wider reach. 
The steam-engine, for example, has long been com- 
mon property. There are, indeed, certain features 
of the more perfect engines still restricted in their 
manufacture by the rights of individuals, and this 
will always be so while invention continues busy, 
but the perpetual tendency in all inventions is from 
individual property towards a common right. And 
it is here in place to remark, that the application of 
machinery to all departments of production, and the 
introduction of improved processes of every name, 
can hardly in the first instance be prejudicial to any, 
and are sure ultimately to be beneficial to all. 

What is the effiect on values of these processes 
now made easier in all directions ? Clearly, since 



110 ELEMENTS OF POLITICAL ECONOMY. 

value is nothing but the relation . between two ser- 
vices exchanged, no effect at all is produced on val- 
ues, if the improvements have gone on equally in all 
directions. Everything exchanges just as before. If 
the improvements have not gone on equally, then 
the value, that is, the purchasing power, of those 
products is diminished in whose production the im- 
provements have been relatively greater. As the 
service has now diminished, the value, other things 
being equal, has diminished along with it. For such 
a service less can be demanded in return. The 
utility of the product, on the other hand, that is, 
its capacity to gratify desire, remains as before. A 
less effort produces the same utility. The portion of 
effort thus set free, however, is not probably idle. It 
will be still put forth to create a larger number of 
products of the same kind, each one of which indeed 
has less purchasing power than before, but the aggre- 
gate value of which is much greater than before. 
For example, when machinery is employed in the 
making of gloves, which before were cut and stitched 
by hand, the value of a pair of gloves, estimated in 
anything whose production has not been altered by 
a similar improvement, will infallibly decline ; but 
the aggregate value of all the gloves made in the 
establishment will be greater than before, because 
otherwise there would have been no motive to intro- 
duce the machinery. Does, then, the machine origi- 
nate value, contrary to the doctrine in the chapter on 
value? Not strictly. The machine originates util- 
ity, since each pair of the now increased number of 
gloves has the same utility as a pair of the former 
fewer number ; and the maker is able to render a 



ON PRODUCTION. Ill 

service to a greater number of persons than before ; 
and it is true, that, for a time, especially if the pro- 
cess be not yet generally applied in glove-making, 
before value has a chance to adjust itself to the new 
state of things, he will realize extra gains ; he will 
obtain, in part, the old price for his product, and it 
would seeni, in this case, as if the machine created 
value. Nevertheless, it is only a transitory state of 
things. Just as soon as machines come to be gen- 
erally employed in the business, value adjusts itself, 
through competition, to the real human service ren- 
dered, and the extra gains of the first operators are 
cut off. The gain of the reduction has now become 
permanent to all consumers of gloves. It is this 
interval between the old price and the new which 
gives to producers the margin for their enterprise, 
and a sharp spur to invent and adopt improvements. 
The improvements once become general, the gain 
redounds to the whole community. The value then 
of all services which have been facilitated by im- 
proved processes, is constantly being lessened rela- 
tively to services not equally facilitated ; and here 
we gain the first glimpse of a truth, which will 
afterwards appear in the clearest light, namely, that 
the value of commodities tends to decline as com- 
pared with human labor, and therefore, that there is 
inwrought into the nature of things a tendency 
towards the elevation of the masses of men in a 
scale of comforts. 

A leading proposition of production is the follow- 
ing : — Production may go on indefinitely iri all direc- 
tions without ever a fear of reaching' a general glut 
of products. This proposition was first fully devel- 



112 ELEMENTS OF POLITICAL ECONOMY. 

oped by Say, in the fifteenth chapter of his well- 
known treatise on " Political Economy," and the proof 
of it, and some of the consequences of it, are well 
worthy of our attention. I shall put the proof of it 
in this form : the desires of men which the efforts of 
other men can satisfy, are unlimited in number and 
indefinite in degree; and therefore, mntual efforts 
can continue to be put forth in exchange, until 
these unlimited and indefinite desires of all men are 
all met — a goal which never can be reached. This 
proposition demolishes at a stroke the fallacy which 
pervades Dr. Chalmers' book on " Political Economy," 
namely, that the universal market is limited, and 
therefore, were it not for the unproductive consump- 
tion of the rich and luxurious, and the equally un- 
productive consumption of wars, there would soon 
be a general glut, and production must cease for the 
lack of a vent for its products. What constitutes a 
market for anything? This, that somebody desires 
the service thus offered, and is willing to render a 
return service acceptable to the offerer. Only two 
things can limit the universal market, first, a lack 
of desires, and secondly, a lack of return services. 
But there can be no lack of desires at any time, and 
there will be the greatest plenty of return services 
where production is most busy and most universal. 
Therefore, again, no general glut of products, is pos- 
sible to occur. A truth which we have already seen 
in another connection, reappears here as a conse- 
quence of this proposition, and will reappear agam 
and again, namdy, that all persons are interested 
commercially, as well as morally, in the prosperity of 
other persons, and each nation which has anything 



ON PRODUCTION. 113 

to exchange, is directly interested in the prosperity 
of all other nations ; because the more production 
everywhere, the better market everywhere. A mar- 
ket for products is made by products in market. 

But while no such thing as a general glut of prod- 
ucts ever did, or ever can occur, a glut in respect to 
certain services is very common. Through want of 
foresight, or miscalculation, particular services are 
offered in too great abundance, or of a kind not 
adapted to the demand, and in respect to these the 
market is truly said to be glutted. This frequently 
happens with editions of books; more copies are 
printed than can be sold at remunerative prices. 
Also when fashion changes, the goods which were 
fashionable, but are so no longer, are apt to be in 
excess of the demand. The only precaution that 
can be taken to avoid losses of this character, is the 
cultivation of foresight, by studying as accurately 
as possible the nature of human desires, and the 
changes that have been observed to take place in 
them. This constitutes mercantile sagacity ; and 
the most successful producers in all departments are 
those who best develop this sagacity, who adapt 
their services to the existing and coming demand, 
^vho, to excellence in the substance of their services, 
add taste and attractiveness to their form, who tend 
rather to lead the fashions for the many than fol- 
low in their wake. The field of production is like 
the billowy and heaving sea : to navigate most suc- 
cessfully requires foresight, a wise courage, a power 
of adaptation to varying circumstances, skill to veer 
and tack when the wind changes, and a will to scud 
before a favoring breeze with all sails set. Produc* 

8 



114 ELEMENTS OF POLITICAL ECONOMY. 

tion, as a general rule, is no dead level of monoto- 
nous exertion ; since its sphere is life with its wants, 
man with his desires ; and there is scope for the 
development of ingenious mind in almost all of its 
departments. Since all exchange is due to the 
diversity of relative advantage, whoever develops 
his powers of observation, of application, of adap- 
tation, to a higher point, and avails himself more 
skilfully of all peculiar facilities, will reap a larger 
share of the harvest of exchange. 

The immense increase of production, and the su- 
perior perfection of products consequent upon what 
he calls the Division of Labor, was fully pointed out 
by Adam Smith. The chapter in which this author 
treats of the division of labor, has always been the 
most famous, and is still one of the most interesting 
in the " Wealth of Nations." We have already seen 
how exchange is stimulated and made profitable by 
the diversity of employments, and by the applica- 
tion of all peculiar gifts to the corresponding obsta- 
cles which lie in the path of production : this is the 
more general truth of which Adam Smith's prin- 
ciple of the division of labor is a specific part. He 
means by this term the dividing up of a process or 
employment into particular parts, so that each per- 
son employed can devote himself wholly to one 
section of the process. The proposition is, that by 
means of the division of labor, the processes of pro- 
duction are vastly facilitated. He cites, as an illus- 
tration, the manufacture of pins. One man draws 
out the wire, another straightens it, a third cuts it, 
a fourth sharpens the points, a fifth grinds it at the 
top for receiving the head. The making the heads 



ON PRODUCTION. 115 

consists of two or three distinct operations, each 
confided to a single person. The remaining proc- 
esses are similarly divided up, and the result is, 
according to Dr. Smith, that in a single establish- 
ment, employing only ten persons, 48,000 pins are 
made in a day, while if each man went through all 
the processes himself, he could hardly make twenty 
pins a day, or two hundred for the whole establish- 
ment. Perhaps a more striking illustration of the 
division of labor may be found in the art of watch- 
making. According to evidence brought before a 
committee of the British House of Commons, there 
are one hundred and two distinct branches of this 
art, to each of which a boy may be put apprentice ; 
and when his apprenticeship is expired, he is unable, 
without subsequent instruction, to work at any other 
branch. The watch-finisher is the only person, out 
of the one hundred and two, who is able to work in 
any other department than his own. The causes 
of increased efficiency imparted to production by 
the division of labor are reduced by Dr. Smith to 
three : — 

1. The improved dexterity, corporeal and intel- 
lectual, acquired by the repetition of one simple 
operation. 

2. The saving of the time which Is commonly 
lost in passing from one species of work to another, 
and in the change of place, position, and tools. 

8. The invention of a great number of machines 
which facilitate and abridge labor in all its depart- 
ments. Because the simple task which complete 
division of labor gives to each operator is precisely 
what machinery may most easily be made to per- 



116 ELEMENTS OF POLITICAL ECONOMY. 

form, and what the operator, if intelligent, will be 
most likely to devise machinery for. Add to these 
advantages of the division of labor these other : — 

4. The saving of the waste of material, partly as 
the result of this improved dexterity; and frequently, 
also, as the result of the shorter time required to fin- 
ish up the product. 

5. The more economical distribution of labor by 
classing the operatives according to their strength, 
skill, and experience. The easier parts may be per- 
formed by women and by children, whose labor is 
less expensive ; the ruder parts by ruder hands ; and 
only the more difficult processes by the most skilful 
workmen, who must be highly paid. Next to the 
first, this advantage is the most important. 

6. There is a saving in tools. The various imple- 
ments, being now in constant use, yield a better 
return for their original cost; and therefore their 
owners can afford to have them of a better quality, 
and this, too, facilitates production. 

7. It brings the producers and consumers into 
more intimate and safe relations. The division of 
labor between the wholesale and the retail trade is 
of great advantage. The retailers know their local 
markets, and supply them without loss or waste from 
the wholesale reservoirs. The wholesale reservoirs 
neatly control the various streams of production, 
according as demand is slackened or intensified. 
Thus, for example, a large city is daily supplied 
with fresh meat, without the loss, perhaps, of a hun- 
dred weight. 

There are some disadvantages resulting from this 
division of labor : — 



ON PRODUCTION. 117 

1. The work becomes in some departments mon- 
otonous and irksome, while some variety of occu- 
pation would afford relief by employing different 
muscles, or different faculties of the mind. 

2. There is some tendency to dwarf the mental 
and corporeal powers, through exclusive attention to 
one part only of a complicated process. 

3. When this part has been learned, and long 
made the means of a livelihood, a person has less 
power to adapt himself to change of circumstances, 
and becomes too much dependent on the continu- 
ance of the business in that form. 

The degree to which the division of labor can be 
carried, depends in part upon the extent of the mar- 
ket, and in part upon the nature of the employment. 
To recur to Dr. Smith's illustration of the pins: if 
the market would only have received 24,000 pins 
a day from that establishment, instead of 48,000, 
the division of labor could not have been carried to 
the same extent, because if it had been, the men 
would be idle one half the time. In that case, some 
of the men would be dismissed, and some of the 
separate processes be combined, and production 
would be less efficient from the limitation of the 
market. Production, therefore, is most profitable 
when the market is broad enough to allow a full 
division of labor, and complete employment to all 
the operatives; and, the market being presupposed, 
is more likely to be profitable in large establishments 
than in small; because, (1) the division of labor can 
be carried to a fuller extent; (2) more perfect ma- 
chinery can be afforded; (3) relatively less superinten- 
dence is required ; and (4) the scraps and ends of a 



118 ELEMENTS OF POLITICAL ECONOMY. 

large business are frequently of sufficient importance 
to justify one or more subordinate branches of busi- 
ness in connection with the main business. For 
example, a large saw-mill may profitably furnish 
lath as well as lumber, since the refuse boards and 
slabs may go to lath. A wholesale butchering estab- 
lishment of neat cattle might profitably have, in con- 
nection with the sale of meat, a tannery to dispose 
of the hides, a comb manufactory to dispose of the 
horns, a glue manufactory to dispose of the feet, a 
stall for the hair, which is useful in plastering, while 
the offal might be chemically disposed of in fer- 
tilizers. 

The nature of the employment also limits the 
degree to which the division of labor may be car- 
ried. Agriculture, for instance, allows less of this 
division than most other departments of production, 
because its various operations cannot, from the 
nature of the case, become simultaneous. When 
the sowing is once done, the producer must wait 
some months upon Nature, till his agency is again 
required in the reaping. This fact, that agriculture 
can be less facilitated by the division of labor, and by 
the use of machinery, than most other departments 
of material production, constitutes one ground of an 
important truth, which we shall hereafter perceive 
stands also on another and firmer ground, the truth, 
namely, that agricultural products tend constantly to 
rise in value as compared with other commodities. 



ON LABOR. 119 



CHAPTER VI. 

ON LABOR. 

It is a curious thing, and one that draws after it 
very important consequences, that physical labor 
consists simply in moving things. When a man 
works with his hands, all that he does, or can do, 
is to produce a series of motions. Human muscles 
are only capable of two things, namely, producing 
motion, and resisting motion. All the marvellous 
results of human labor in all the world, have flowed 
from so simple a matter as the contraction and ex- 
pansion of muscle. Work is motion, and weariness 
is weariness of muscle. The world of materials is 
so cunningly constructed, that, when they are moved 
into right position the powers of Nature do the rest, 
and objects of utility are the result. 

When the pioneer fells a tree, he moves his axe 
through the trunk, and then the power of gravitation 
seizes the tree, and brings it to the ground. He pro- 
duces a series of motions upon the tree, but the final 
motion, by which the century-girdled oak comes 
crashing to the earth, is not of his producing. Na- 
ture does that. Wool, cotton, and flax, have by 
nature a certain tenacity of fibre. Man moves these 
fibres in certain relations to each other by an instru- 
ment called a spindle, and the result is thread. Then 
the threads are moved in certain relations with each 



120 ELEMENTS OF POLITICAL ECONOMY. 

other by an instrument called a shuttle, and the re- 
sult is a web of cloth. The tailor moves his shears 
through the cloth, and then his needles, and the result 
is a coat, — the object of utility for which all these 
processes were gone through with. The farmer first 
moves the ground, then moves his seeds into it, 
moves his sickle through the standing corn, moves 
his corn to the granary and mill, moves his meal 
from the mill to the larder, at which last point he 
surrenders the product to the official who acts in the 
capacity of houeewife. She moves the meal to the 
kneading-trough, and, having well moved it there, 
moves it to the oven, and, from the oven, after due 
interval, moves it to the table, at which point pro- 
duction ceases, and consumption begins. 

Physical labor, then, is, and can be, nothing but 
this, an effort^ by which materials or implements are 
moved with reference to a given result. Nature fur- 
nishes all the materials, and all the primary qualities 
of which we avail ourselves in production. She 
cooperates at every step. We pay her absolutely 
nothing for all she does. All we can shirk off our 
own shoulders, and throw upon hers, is so much clear 
gain. And it is a most happy circumstance that 
this is being done more and more completely in the 
production of nearly all commodities. Nature is 
good, to use a commercial term, for all she can be 
made to carry. 

Now, since motion is the only thing which man is 
required to furnish in the production of commodities, 
he naturally looks around for helps in this matter. 
The first thing he lighted on, as a help to produce 
motion, was the domestic animals. The ox, th"e ass, 



ON LABOR. 121 

the horse, were doubtless domesticated in the very 
beginnings of society. Men want these animals to 
produce motion for them — simply that. And as 
they can be used in so many different places, and 
for such a variety of purposes, and are so cheaply 
reared, they are exceedingly convenient as a motive 
power, and will probably never be superseded. The 
discovery and application of the great motive powers 
of water and steam have scarcely occasioned a 
lessened demand for the earlier and humbler motors, 
oxen and horses. Some of my readers will probably 
remember the time, when the introduction of rail- 
roads was opposed by some people, on the groun(3 
that the value of horses, and the business of team- 
sters would thereby be destroyed. Experience has 
demonstrated in this case, as it does in all similar 
cases, that improved machinery, and improved facil- 
ities of all kinds, so far from harming any class of 
persons permanently, are likely to be a gain to all 
classes of persons. At least, they only are harmed, 
who stupidly hold on to the old methods. 

Labor, having employed from a very early time 
as a motive power the domestic animals, secured 
after a while, as inanimate auxiliaries, the water- 
wheel and the windmill; and, much later, the steam- 
engine. It is a point that has scarcely been noticed, 
even if it has ever been noticed at all, that all these 
auxiliaries, whether animate or inanimate, produce 
simple motions of the same kind as, and only sup- 
plemental to, the motion produced by a human arm. 
The most ponderous engine merely reduplicates that 
which the arm of a child is capable of; while in 
point of delicacy and firmness of touch, perhaps no 



122 ELEMENTS OF POLITICAL ECONOMY. 

machinery has yet been devised which can subdivide 
and apply this n:iotion as skilfully as the human 
fingers can. It is said, that some of the lace made 
wholly by hand, is finer and more delicate than any 
yet woven by machinery, although the introduction 
of machinery into lace-making has cheapened the 
product, according to Dr. Ure, to about ^-^ of its for- 
mer cost. What we call power, then, however pro- 
duced, is simple motion. But in order to subdivide 
these motions and apply them to the various purposes 
of production, implements of all sorts are needed, 
and implements, as we shall see in the next chapter, 
are always the gift of capital. But no power how- 
ever mighty or however delicate, and no implements 
however perfect, can ever dispense with some por- 
tion of human labor. Not until machinery can be 
taught to think, to adapt means to ends, will human 
labor cease to play a chief part in production. These 
therefore, are, and always will be, the three requisites 
of material production : Labor, Power- Agents, Cap- 
ital. 

Besides physical labor, there are the various forms 
of mental efforts put forth by men to satisfy the 
desires of other men, and with reference to a return. 
So far as exertion, physical or mental, is put forth 
for amusement, or for a pure benevolent motive, it 
has nothing to do with Political Economy. It is only 
exertion which demands for itself something- in ex- 
change, that is technically labor. Labor, w^hich is 
primarily mental, such as most professional labor, 
the labor of the editor, the teacher, the architect, 
has of course little connection with motion or with 
commodities. But it is not on that account less 



ON LABOR. 123 

useful or less valuable. The exchange of simple 
services depends on the same principles, gives rise to 
the same phenomena, and is amenable to the same 
science as all other exchanges. One man, as the 
violin-maker, offers services in which a commodity- 
intervenes ; another, as the violinist, offers services 
in which no commodity intervenes ; each has gained 
in his own art a point of relative advantage as com- 
pared with other men, and these doubtless have 
gained some point of relative advantage as compared 
with them ; each, by the sale of his respective ser- 
vice, meets some desire of the buyer, and is paid on 
the same principle as the other. The violin-maker 
of Cremona, who sold his instruments for five hun- 
dred francs apiece, was no more and no less a laborer, 
in the language of our science, than Paganini, who 
sold an hour's playing in the theatres for five thou- 
sand francs. 

Having now seen what labor is, let us pass to the 
principles that determine its remuneration. I can 
see no reason why the purchasing-power of labor is 
not determined in the same way as the purchasing- 
power of all other things ; and, if so, there is no 
difficulty in pointing out the general law of wages. 
I go back constantly to first principles, because I 
believe that first principles really control everything. 
Chance effects there most certainly are ; but, as they 
happen now on one side and now on the other, they 
balance each other, and leave all the great working 
forces unaffected. For the sake of convenience, a 
distinction may be made at this point between pro- 
fessional and common labor, — a distinction which 
is not indeed very definite, but which is sufficiently 



124 ELEMENTS OF POLITICAL ECONOMY. 

SO for the purpose in hand. The wages of profes- 
sional labor of all sorts run up and down upon a 
scale whose extremes are much wider apart than the 
extremes of the scale which marks the variations in 
the wages of common labor, while at the same time 
the principle that determines the value of both forms 
of labor alike is the principle that determines all 
other value, namely, the law of Supply and Demand. 
The wages of professional labor, however, are so far 
different from the wages of common labor as to 
demand a somewhat distinct treatment. Why could 
Daniel Webster demand a fee of a thousand dollars 
for attending to a single case in court, Paganini a 
like sum for an hour's playing on a violin, and Jenny 
Lind at least as much for an evening's singing in a 
concert ? Because there was in each case a strong 
demand for a peculiar service, and only one person 
in the whole world who could render that service, at 
least in the same perfection. The demand was 
large, the supply was small, and the value conse- 
quently great. The highest efforts of professional 
skill will always receive a high reward, whenever 
there is one person even, who, together with a strong 
desire for the product, has also the power to give a 
service in return ; and especially whenever there are 
many persons who have a similar desire and power, 
to whom, as in the case of Paganini and Jenny Lind, 
the service can be rendered in common without 
lessening the satisfaction of each individual. That 
the supply is small in these higher regions of skilled 
effort, is due partly to the fact, that Nature is not 
lavish in her gifts of peculiar talents, and partly to 
the fact, that those who have received have assidu- 



ON LABOR. 125 

ously cultivated them, and have reached in conse- 
quence a high point of relative advantage. These 
persons have what may be called a natural monop- 
oly in their respective fields of high effort, because 
there are few others who have the natural gifts and 
the acquired skill which enable them to come in 
competition with them. But the objections which 
lie with such force against artificial monopolies, can- 
not be urged at all against a natural monopoly; for, 
if the road to excellence be open to all, and no arti- 
ficial obstructions thrown in the paths of any, there 
is no blame but rather praise for him who distances 
all competitors, and demands for services of peculiar 
excellence a large remuneration. John Sartain is a 
superior engraver: he enjoys a natural monopoly in 
the highest walks of that art ; the wages of his labor 
are very high; yet nobody can complain of this, 
since he has had no factitious privileges, but has 
fairly attained his excellence under freedom. Ex- 
change rejoices in all diversity of advantage that is 
the birth of freedom, but reprobates with all her force 
advantage that is gained by artificial restrictions, 
because artificial restrictions always infringe on 
somebody's right to render services for a return ; and 
the right to render services for a return is the funda- 
mental conception in the right of Property. The 
wages of professional labor, then, are determined by 
the relations between the demand for such labor and 
the supply at hand ; and are usually higher than the 
wages of common labor, because the supply of such 
laborers is restricted by the lack either (1) of appro- 
priate original gifts, or (2) of the requisite industry, 
or (3) of the means of suitable education and train- 
ing. 



126 ELEMENTS OF POLITICAL ECONOMY. 

Within the great law of supply and demand, there 
are several important subordinate principles, which 
go to vary the wages of both professional and com- 
mon labor, principally through their action upon 
supply ; and it is now in order to consider these, 
before we pass to consider the wages of common 
labor. In common with all the writers who have 
succeeded him, I shall avail myself freely at this 
point of the labors of Adam Smith, That writer 
considers that there are certain circumstances in the 
employments themselves, which either really, or at 
least in men's imaginations, make up for a small 
pecuniary gain in some, and counterbalance a great 
one in others. 

1. The agreeableness or disagreeableness of the 
employments will have an influence in determin- 
ing the rate of wages paid to those who engage in 
them. The more agreeable employment will attract 
the larger number, and will experience in conse- 
quence the press of competition, and the rate of 
wages will be lessened by the increased supply of 
laborers. The more disagreeable employment will 
feel less the pressure of numbers, and will secure, 
other things being equal, a higher rate of remunera- 
tion in consequence. Among the elements which, 
in spite of the diversity of natural tastes, make any 
employment agreeable or disagreeable to the labor- 
ers, are (1) the less or greater exertion of physical 
strength required, (2) the healthful ness or unhealth- 
fulness of the labor, (3) its cleanliness or dirtiness, 
(4) the degree of liberty or confinement in it, (5) the 
safety or hazard of the employment, (6) the esteem 
or disrepute of it in public opinion. To illustrate 



ON LABOR. 127 

each of these in order, the stone-mason, the glass- 
blower, the scavenger, the factory operative, the 
worker in a powder-mill, the smuggler, will each 
receive a larger compensation owing to the peculiar 
element of disagreeableness involved in his employ- 
ment ; and he will be able to demand and secure it 
through the action of the disagreeableness upon the 
supply of such laborers. Of all these elements, 
public opinion is perhaps the most operative ; and 
if this be favorable to an employment, and some 
social consideration be attached to it, and only com- 
mon qualifications be required for it, the wages in it 
will infallibly be low. This is probably the main 
reason why so many young women prefer to teach, 
rather than be employed in mills, shops, or offices, and 
why the wages of female teachers are so pitifully low; 
although each of the elements of agreeableness spec- 
ified above may also contribute something towards 
the same result. If a business be decidedly opposed 
to public opinion, it must hold out the inducement 
of a large reward, or nobody will engage in it. This 
explains the abnormal gains of the slave-trade, the 
liquor-business, of gambling-houses, and of lotteries. 
2. The easiness and cheapness, or the difficulty 
and expense, of learning different employments, 
will have an influence on the rate of wages paid 
in them. The more quickly and cheaply one can 
learn to perform the duties of a place satisfactorily, 
the less, so far forth, will be his wages; because 
there will be many who will compete with him in 
rendering such services ; the more time, difficulty, 
and expense involved in learning a business, the 
larger, so far forth, will be the wages secured by it ; 



128 ELEMENTS OF POLITICAL ECONOMY. 

because fewer persons have the means, the foresight, 
the patience, to prepare themselves for such an avo- 
cation. This is the principal ground of the differ- 
ence in the wages of skilled and unskilled labor. 
The artisan has, at least, given time, and the pro- 
fessional man has given both time and money, to fit 
themselves to render the services which they now 
offer to society ; and it is right, therefore, for them 
to demand a higher rate of compensation than is 
accorded to operatives and common laborers. But 
a right to demand does not always carry along with 
it an ability to secure : in this case it does, through 
the reduction of numbers which these ol)stacles at 
the entrance occasion, and the consequent weakness 
of competition. To put a boy apprentice to a trade, 
requires on the part of the parents a foresight, an 
ability to get on without his immediate help, and 
sometimes an amount of money for his board and 
clothes, which all parents do not possess ; and con- 
sequently, the number of skilled artisans, who must 
learn when they are young if at all, are relatively 
few compared with common laborers, and are able 
to realize a much higher rate of wages than they. 
In the professions, if we confine our attention to 
those persons who are thoroughly trained for them, 
we shall find a higher rate of compensation still, 
and one made higher on the same principles ; 
although we must here bear in mind the coun- 
ter-working influences which tend to increase the 
competition in the professions, namely, the respecta- 
bility which attends them, the desire of knowledge 
for its own sake which is gained in connection with 
them, the instruction wholly or in part gratuitously 



ON LABOR. 129 

offered to those in course of preparation for them, and 
the desire to do good, without regard to pecuniary 
reward, which actuates many who enter upon them. 

3. The constancy or inconstancy of employment 
is a consideration that affects wages. If the em- 
ployment be such that it can only be carried on 
during nine months of the year, the wages of the 
day or month will be greater than they would be if 
it could be carried on during the twelve months. 
The laborer looks to the aggregate earnings of the 
year, and will hardly take up a trade which affords 
employment but a part of the time, unless some 
compensation can be found in the higher wages for 
that time. This is the chief reason why the day's 
wages of the mason and the house-painter, in this 
climate at least, are higher than those of the car- 
penter or smith. The coachman, also, may stand 
by his horses half the day or night, with no call 
for his services, and must have, therefore, a propor- 
tionably higher fare from those whom he does 
transport. In general, it is found that men prefer 
a constant employment with a lower rate of wages, 
than an inconstant one, with a prospect of higher 
pay for the particular jobs actually done, and be- 
cause they prefer that, those who take up with the 
other are able to secure a higher rate of pay in their 
less eligible avocation. Counter working this, how- 
ever, are the desires which many men have, for 
intervals of leisure in their business ; and the op- 
portunity to make these intervals subservient to 
another branch of business or means of livelihood. 

4. The amount of trust involve.d affects wages. 
Men in responsible positions secure a higher rate of 



130 ELEMENTS OF POLITICAL ECONOMY. 

pay for their services than can be accounted for, ex- 
cept by a reference to the unwillingness of people 
to intrust great interests to others, unless they are 
men of established character for probity. Such 
men, men who combine all the other requisites 
for an important post, with a well-known honesty, 
are comparatively rare ; and, w^hen they are found, 
will receive a very high compensation for their ser- 
vices. Treasurers of corporations, cashiers of banks, 
and holders of trust-funds generally, are examples in 
point. Shall w^e say, then, that men offer their hon- 
esty in the market, as they offer their skill, and are 
paid for the one as for the other ? No ! Their skill 
has been a.cquired to sell, and for no other reason ; 
but their honesty, if it be genuine, has another basis 
altogether ;/ and he who is honest, simply because 
honesty is the best policy, is not honest at all ! The 
very characteristic of honesty is that it cannot be 
bought! It has a moral, and not a mercantile foun- 
dation. In point of fact, a man who has the full 
confidence of his fellow-citizens, as an honest man, 
and at the same time all the other qualifications 
requisite for a post of high pecuniary trust, is in 
position, partly on the ground of his honesty, to 
render a high service, and will receive for that ser- 
vice a high reward ; but I protest, in the name of 
morals, against the notion that honesty is a market- 
able article : it is rather an underlying element of 
moral character, which fits men indeed to render 
certain services, but the honesty is maintained, not 
for the sake of the service, but has an independent 
basis of its own. So, also, most people would pre- 
fer a deeply religious man for a preacher and spir- 



ON LABOR. 181 

itual guide, but it is a perversion of language to 
maintain that in rendering these services a clergy- 
man sells his religion. It is true that he sells ser- 
vices to the appropriate rendering of which his 
personal piety contributes one element; but the 
piety is not nourished for the sake of the services, 
but for its own sake, and it must not be confounded 
with that which is sold. Accordingly, while the 
clergyman's vocation is sacred, and belongs to the 
sphere of religion, his salary belongs to the sphere 
of exchange, and its determination is wholly a busi- 
ness transaction. This distinction ought to be bet- 
ter understood than it is; and both clergymen and 
people need to be reminded that the spiritual things 
belong to one sphere, and the carnal things to an- 
-other. The amount of a clergyman's salary, and the 
time and mode of its payment, are matters of pure 
business; and the clergyman himself is to blame if 
he does not attend to them, and insist on them, on 
business principles. 

5. The probability of success in any employment 
is a circumstance that has some influence on the 
rate of wages paid in it, through the action of this 
probability on the numbers of those who enter upon 
it. If success is problematical, fewer will engage in 
such a business, and those who do engage in it afid 
succeed, will reap a very high reward. Ten boys, 
for example, put to the blacksmith's trade, ordinary 
capacity being presupposed, will probably every one 
succeed in becoming a tolerable workman ; but of 
ten boys of the same capacity put apprentice to an 
engraver, probably not over three would ever reach 
any high degree of skill and success ; and therefore, 



182 ELEMETSfTS OF POLITICAL ECONOMY. 

the pressure of numbers will be felt much more in 
the former than the latter art. So also, those who 
take jobs by contract, and who consequently assume 
some risks, are usually paid at a higher rate than 
those who do work by the day. It is true that this 
is owing partly to the fact that the contractor com- 
monly uses his own capital, and must therefore be 
paid profits as well as wages, and also that the 
wages of superintendence are due to him as w^ell 
as ordinary wages ; still there is a residuum of 
difference which can only be accounted for by the 
risk he runs of a successful issue. The differ- 
ence in wages from this fifth cause of variation, 
would be greater than it is, were it not for the over- 
weening confidence which most men have in their 
own good luck. This confidence is seen in the rush- 
which is always made for newly discovered mining 
regions, and in the facility with which even yet lot- 
tery tickets are sold. It is demonstrable beforehand, 
on the doctrine of chances, that no lottery ticket is 
worth so much as it is sold for, and yet men buy on 
in spite of the demonstration ; and experience in 
California and at Pike's Peak, has sadly taught how 
excessive was the confidence in their own success of 
the men who flocked to those new El Dorados. 

6. Custom and prejudice and fashion, have some- 
thing to do with the determination of wages in some 
departments. Custom, especially in former times, 
has been very operative. The current fees of law- 
yers and physicians have been largely dependent on 
custom, competition merely coming in to decide 
how many such fees a man should get, rather than 
lessening the amount of each particular fee. Cus- 



ON LABOR. 133 

torn determines the wages when men take farms on 
shares. But competition is now breaking down 
custom in all directions, and will soon, I think, 
reign supreme over the economic field. Prejudice 
is closely allied to custom, and has some voice still 
in adjusting wages, as may be seen, perhaps, in wo- 
men's wages, crowded down to a point unreasonably 
low, as compared with the wages of men. Custom 
and prejudice may yield the field, but fashion, which 
is one form of competition, will always have an 
influence over wages. They who lead the styles in 
any department whatsoever, will always offer their 
services to society at an advantage to themselves, 
and their rate of compensation will be legitimately 
higher than the average rate. 

7. Legal restrictions and voluntary associations 
are another cause acting on wages, by acting on the 
supply of laborers. Laws inhibiting or promoting 
immigration, laws appointing the fees and salaries 
of ofl^icials, tariff laws, whether prohibitory or only 
restrictive, unequal taxation, and so on, all have an 
agency in adjusting wages. Governments are com- 
ing, however, much more freely than formerly, to 
leave everything except the wages of their own ser- 
vants, and those things which they choose to tax, to 
the simple and safe action of supply and demand. 
The guilds of the Middle Ages, and the trades' 
unions of our own day, are examples of voluntary 
associations for the sake of regulating the wages of 
the members by combined action. The restrictions 
in the old guilds, limiting the number of appren- 
tices to each artisan, determining the time a man 
should serve before he could become a master, and 



134 ELEMENTS OF POLITICAL ECONOMY. 

SO on, were very onerous, and have mostly passed 
away. The trades' unions in this country cannot be 
commended, because they tend to destroy the-free- 
dom of personal action, and bring all workmen to 
one level of wages. The spirit of Political Econ- 
omy, which is the spirit of freedom, is against such 
associations for such purposes. If any man has a 
service to render, let him offer it freely, and make the 
best terras he can with whoever wants it. 

Having looked at the principles that determine 
the compensation of skilled labor, and also at some 
causes tending to vary the wages both of skilled 
and -common labor, we pass now to a consideration 
of those principles more particularly applicable to 
the wages of common labor. All value, as we 
know, is a resultant of two desires and two efforts, 
and is variable by any variation of either desire or 
either effort. When the laborer offers a series of 
efforts to another person, he does so in virtue of a 
desire for something which that other person has to 
give, for food, clothing, money ; and the other person 
has a desire for the efforts of the. laborer, and is 
willing to give in return the food, clothing, money, 
or whatever it may be. The more laborers there are 
who offer their service to this person, the more likely 
he is to obtain the service at a cheap rate, since 
there is a competition among the laborers to secure 
that food, clothing, money, and so on, which he 
offers in return for the service : the more persons, on 
the other hand, who offer food, clothing, money, and 
so on, to the laborers there present, the more likely 
are the latter to receive a high rate for their efforts, 
since there is a competition among employers to 



ON LABOR. 135 

secure such efforts. The number of employers and 
the amount of that which they offer as return for 
such efforts, constitutes the demand for laborers ; 
the number of laborers willing to render service for 
what is thus offered in return, constitutes the supply 
of labor: the cunrent rate of wages of common 
labor is determined by the adjustment, that is, the 
equalization of the demand and supply. In what 
we have said thus far in relation to wages, we have 
referred chiefly to causes acting on the supply of 
laborers, rather than on the demand for labor : we 
must now look in the other direction, and anticipate 
the discussions of the next chapter, so far as to say, 
that all capital constitutes an immediate and pressing 
demand for labor. Whoever desires a service which 
a laborer can render, and lays by something to pay 
for that service, creates that instant a demand for 
labor; and especially, whoever accumulates raw ma- 
terials which laborers are to work up, builds, buys, 
or keeps machinery which laborers are to tend, or 
puts himself in position to suffer loss by the owner- 
ship of lands, ships, or other property whatsoever, 
unless laborers be employed to make them produc- 
tive, creates thereby an instant demand for labor. 
All such accumulations whatsoever, destined in the 
owner's mind to be employed in further production, 
all implements, buildings, and improvements, de- 
signed to assist labor, and raw materials which labor 
must work up, are capital; and capital must be con- 
stantly united with labor, or the owners will suffer 
an inevitable loss. The presence of capital any- 
where constitutes a demand for labor. The more 
capital there is anywhere, the stronger the demand 



136 ELEMENTS OF POLITICAL ECONOMY. 

for labor; and capital, therefore, is the poor man's 
best friend. Mr. Carey regards the laborer as at a 
disadvantage compared with capital, because the 
laborer must at once dispose of his product, or 
starve ; which seems to me a superficial view of the 
relation, because capital submits to an instant loss 
when it declines to employ labor. Capital does not 
like to lose its profit any more than the laborer likes 
to lose his bread. In a true and general view, the one 
is under just as much pressure to employ laborers, as 
the other to get employment. They come together 
of necessity into a relation of mutual dependence; 
vhich God has ordained, and which, though man 
nay temporarily disturb it, he can never overthrow. 

Labor, then, takes itself to the market to effect an 
-;xchange with capital. It is only capital that era- 
j^loys labor. Now, the terms of the exchange, that is 
to say, the average rate of the wages of common la- 
bor, will depend on the number of laborers compared 
with the amount of capital there present. The ag- 
gregate of all the forms of capital there present, helps 
to make up in the mind of the capitalist his motive for 
employing labor, because the more he has invested 
in buildings, machinery, and materials, the more 
urgent is the necessity to employ laborers, in order 
to make the investment productive ; although only a 
part of the capital is free to be offered in payment 
of wages. Demand for labor is constituted, strictly 
speaking, by that part of the capital which is avail- 
able to be offered in the form of wages, but it is 
clear, that, as a rule, demand, that is, the portion of 
capital designed for the payment of wages, may 
increase under the influence of increased desire for 



ON LABOR. 137 

laborers, and an increased desire for laborers is a 
necessary consequence of the increase in the aggre- 
gate of capital. Whether the portion designed for 
wages will increase or not, on an increase of capital, 
will depend on the number of laborers. It is cer- 
tainly possible that capital may go on increasing, 
while the wages-fund (the portion designed for wa- 
ges) may remain stationary, or even diminish, owing 
to the competition of an increased number of labor- 
ers, .and the diminished compensation going to each. 
The number of laborers remaining the same, and 
intelligently comprehending their position, the size 
of the wages-fund will necessarily keep pace with 
all increase of aggregate capital. This point of 
connection between the two, this influence of the 
whole capital on the desire for laborers, and con- 
sequently on the wages-fund, is a point which I do 
not remember to have seen noticed by anybody, yet 
which is obviously of much importance in unfolding 
the relations of labor to capital. Now, wherever 
there is capital there is a wages-fund, and we have 
just seen what the connection is between the whole 
capital and that portion of it which is ready to be 
devoted to the payment of wages. If we call this 
portion of capital, or wages-fund, a dividend, and 
the number of laborers a divisor, the quotient will 
be the general average rate of wages at that time 
and place. This principle invariably determines the 
current rate of wages in any country. If the labor- 
ers are few relatively to the amount of capital, there 
will be a large dividend, and a small divisor, and 
infallibly a large quotient. In the reverse case, when 
laborers are many as compared with the capital 



138 ELEMENTS OF POLITICAL ECONOMY. 

that seeks to employ them, the large divisor and 
small dividend will surely give 9, small quotient. In 
the first case, capitalists vv^ill compete for laborers, 
and wages will go up. In the second case, laborers 
will compete for employment, and wages will go 
down. 

We see now what we are to think of many reme- 
dies popularly recommended for low wages. When 
wages are very low in any country, or in any depart- 
ment of labor, there are some who think that the 
government ought to interfere to better them, at 
least to designate a minimum below which wages 
shall not go ; others propose that strong public opin- 
ion be brought to bear upon employers, to induce 
them to give sufficient wages : others still maintain 
that combinations among the workmen themselves, 
for the purpose of dictating the rate of wages to the 
employers, would be an appropriate and effective 
remedy. Every one of these is a delusion, and so 
is every other proposal that ignores the law of wages 
just established. That which pays for labor in 
every country, is a certain portion of actually accu- 
mulated capital, which cannot be increased by the 
proposed action of government, nor by the influence 
of public opinion, nor by combinations among the 
workmen themselves. There is also in every coun- 
try a certain number of laborers, and this number 
cannot be diminished by the proposed action of gov- 
ernment, nor by public opinion, nor by combina- 
tions among themselves. There is to be a division 
now among all these laborers of the portion of capital 
actually there present. Suppose there has been free 
competition on both sides, and that the average rate of 



ON LABOR. 139 

wages as thus determined, is one dollar per day for 
each laborer. Suppose that everybody thinks that 
this is insufficient, and that government accordingly 
issues a decree that wages thereafter must be one 
dollar and a half per day to each laborer. This de- 
cree has no tendency to increase the size of the 
wages-fand ; that is determined by the general pro- 
ductiveness of labor, and by the division, under free 
competition, between wages and profits; if the de- 
cree, therefore, were carried out, as it never could be, 
the result would be that only two thirds of the 
laborers there present could be employed at all, 
and the remaining third must be supported by char- 
ity, or starve. The wages-fund is only sufficient to 
give to all the laborers a dollar a day, and if the 
government enforces a new distribution at a rate 
one third higher, then one third of the laborers can- 
not be employed at all. There is no use in arguing 
against any one of the four fundamental rules of 
arithmetic. The question of wages is a question of 
Division. It is complained that the quotient is too 
small. Well, then, how many ways are there to 
make a quotient larger? Two ways. Enlarge your 
dividend, the divisor remaining the same, and the 
quotient will be larger : lessen your divisor, the divi- 
dend remaining the same, and the quotient will be 
larger. All accessions to capital, all investment of 
profits in an enlarged business, all saving from ex- 
penditure for the sake of further production, will 
increase the dividend, and, the number of laborers 
continuing as before, the rate of wages will rise. 
Or, if there be no accessions to capital, the w&ges- 
fund consequently standing as before, and the nura- 



140 ELEMENTS OF POLITICAL ECONOMY. 

ber of laborers be diminished, as by emigration to 
new fields of effort, or by enlistment in armies, the 
divisor will be lessened, and the rate of wages will 
rise. The reversed suppositions will give, of course, 
reversed results, and wages will go down. 

Though not in the way proposed, there is a way 
in which government may act most beneficially 
upon this matter of wages. By faithfulness to its 
peculiar trust, that is to say, by making the rights 
of person and property as secure as possible, it gives 
an impulse to enterprise, a spur to industry, makes 
the desire of accumulation effective, and thus indi- 
rectly but most powerfully contributes to the in- 
crease of capital, to the fund out of which wages 
are paid. Also, by fostering the means of educa- 
tion, and by the diffusion of knowledge among all 
classes, government acts beneficially upon the labor- 
ers, to make them intelligent, to impart to them that 
character and self-respect which fits them, in ex- 
changing services with capital, to demand and secure 
their full rights in the exchange. It is not denied 
that capital takes advantage of the ignorance and 
immobility of laborers, and sometimes secures their 
services at a less rate than the just relations of 
capital to labor then and there would indicate, but 
the remedy for this is not in arbitrary interference 
of government in the bargain, but in the intelligence 
and self-respect of the laborers which shall fit them 
to insist on a just bargain. In this whole sphere of 
exchange, the just and comprehensive rule always 
will be, that when men exchange services with each 
other, each party is bound to look out for his own 
interest, to know the market- value of his own ser- 



ON LABOR. 141 

vice, and to make the best terms for himself which 
he can make. Capital does this for itself, and la- 
borers ought to do this for themselves, and if they 
are persistently cheated in the exchange, they have 
nobody to blame but themselves. Government 
should give them all facilities for intelligence: 
they should give themselves a character, and cher- 
ish a hearty self-respect, which there is nothing in 
their position to diminish : towards such laborers, 
capital occupies no vantage ground in an exchange 
of mutual services. 

Public opinion can do something towards better- 
ing the wages of labor, in countries where they are 
low, by organizing means to assist the laborers in 
distributing themselves at points where their ser- 
vices are most in demand. Societies in our sea- 
board cities, whose object it is to aid immigrants to 
pass on from those cities where labor is very abun- 
dant, to the country towns and to the West, where it 
is relatively much less so, are commendable in their 
purpose and spirit. So also are emigration societies, 
in countries situated as Ireland has been, where cen- 
turies of misgovernment combined with centuries of 
ignorance, produced a temporary pressure of popu- 
lation on the means of support. Where such pres- 
sure exists, as it does also in China, it is a good 
thing for public opinion to be favorable to emigra- 
tion to newer and more fortunate countries, and 
liberally to assist in the distribution of labor to those 
points, wherever they may be, where capital is ready 
and anxious to employ it. 

It may surprise some who are familiar with books 
on Political Economy, that I do not here adduce the 



142 ELEMENTS OF POLITICAL ECONOMY. 

influence of public opinion in restraining population 
as favorable to wages, and inveigh against the force 
of that spring of population which the Creator has 
coiled up in the nature of man, as compared with 
the weakness of that power by which the earth pro- 
duces sustenance for man. Mr. Malthus, and other 
economists, have discussed at length the tendency in 
the law of human fecundity to outstrip in its results 
the law of diminished returns from land ; and have 
expressed an apprehension that the time may come 
when the earth shall be unable to support her chil- 
dren. They have enlarged upon the well-known fact 
that in the United States population doubles every 
twenty-five years ; and have calculated that, at this 
rate, the inhabitants of every country would, in the 
course of five centuries increase to above a million 
times their previous number ; that the population of 
England, for example, would, at this rate, in that 
time, exceed twenty million millions, — a population 
w'hich would not allow them standing-room. Such 
a rate of increase certainly needs to be checked ; and 
Mr. Malthus divides the checks to population into 
the positive and the preventive. The first increase 
the number of deaths, the second diminish the num- 
ber of births. The principal positive checks are war, 
famine, and disease ; the principal preventive check 
is prudence. Of course it is better that the check 
which limits fecundity should come into play, rather 
than those which decrease longevity ; and these writ- 
ers are at pains to inculcate upon the laboring classes 
prudence in marrying, and temperance after marriage. 
These discussions are interesting in themselves, and 
have attracted much attention ; but I cannot regard 



ON LABOR. 143 

them as particularly pertinent to discussions on 
wages. God has endowed mankind with a strong 
impulse towards procreation. But experience has 
shown that it is not too strong for the purposes for 
which it was given. Experience has also shown 
that, as society advances, and men come more and 
more under the influence of reason, and affection, the 
pr;iventive check comes silently and effectually into 
operation. Experience has shown also that food and 
comforts have more than kept pace with the stride 
of population ; since the inhabitants of the world, as 
a whole, were never so well fed and clothed and 
housed as now. The abstract antagonism of the law 
of the increase of population with the law of the 
increase of food is admitted ; but he who is author 
of the laws is author also of natural counter-work- 
ings of them ; so that a practical tendency towards 
their coming into conflict is denied. Each human 
being, is as much constituted by Nature to receive 
services as to render them, and each is as likely as 
any of the others to become a capitalist ; and there- 
fore the law of population, the maladministrations 
of men aside, has no scientific relevancy to the ques- 
tion of wages. Whenever population has pressed 
on food, reasons for it are apparent outside of nat-* 
ural laws. 

But will not strikes accomplish that for the raising 
of wages which neither government nor public opin- 
ion can effect? A strike is a combination among 
workmen for an increase of wages. They agree to 
stop work altogether until their employers shall com- 
ply with their terms, and raise their wages to a cer- 
tain definite sum. It is not to be denied that work- 



144 ELEMENTS OF POLITICAL ECONOMY. 

men thus possess, under many circumstances, a very 
considerable reserved power which they can bring to 
bear upon their employers. When the processes of 
production are going briskly forward, when the man- 
ufactory is thoroughly furnished with competent 
hands, and profitable orders are in waiting, it is no 
laughable thing for the owner to be told, of a cloudy 
morning, that his hands have all stopped work, and 
refuse to lift a finger, until he shall agree to pay them 
wages at a rate which they themselves dictate. Of 
course, his first impulse is to discharge every man of 
them, and endeavor to fill his factory with new hands. 
But this he cannot always do. At best it will take 
time. Meanwhile his wheel or engine must be idle, 
customers be lost, orders unfilled, and profits no- 
where. And so, many an employer has surrendered 
to a strike, when he felt that it was all unjust, rather 
than undergo a still greater loss. It is admitted that 
workmen may sometimes strike and gain their point, 
but it is none the less true for' all that, that strikes 
are false in theory and pernicious in practice ; that 
they spring from utter misapprehension of the true 
principles of wages ; that they embitter relations 
between employers and employed which ought to be 
cordial and free ; and that they rarely or never are 
permanently advantageous to the workmen them- 
selves. 

In the first place, then, strikes are false in theory. 
It is a very old adage, that it takes two to make a 
bargain. Express this in the language of Political 
Economy, and it will take this form : When two 
men have mutual services to exchange, let them 
come, to a fair agreement as to the terms on which 



ON LABOR. 146 

they will exchange. Certainly, let each make the 
best terms he can, but let the bargain always be free. 
If one party, who happens to have the power to do 
it, uses compulsion upon the other, it ceases to be a 
bargain at all, and becomes a sort of robbery. If, 
driving with my good horse along a lonely road, I 
meet another man driving an inferior one, and he, 
being the stronger man, compels me to exchange 
horses, it may be all very well for him, but I protest 
that it is no bargain. It is robbery. Now, workmen 
bring a certain valuable service to the market, just 
such a service as the capitalist wants, and he has to 
offer just such a service as they want, namely, wages. 
Now let them come to a free and fair agreement on 
the terms of their exchange. Let the workmen by 
all means make the very best terms they can ; let 
them insist to the last penny on all which they can 
get elsewhere, for the value of their service is deter- 
mined, as the value of every other service is deter- 
mined, by what it will bring. Let the employer do 
the same. Let a fair bargain be struck. There is 
no objection to this kind of striking ; and the more 
intelligence and skill and self-respect a workman has, 
the better prepared he is to strike the bargain and 
secure his just due. If the employer will not yield- 
him this, let him have done with it at once, and go 
elsewhere. Or, if a just bargain has been struck, 
and afterwards circumstances shall so alter that he 
thinks he can rightfully demand more, let him frankly 
demand it, remembering always that it is an ex- 
change he has to do with, and that it takes two to 
make a bargain. If he does not get for his service 
what he thinks he ought to get, let him quit. He 

10 



146 ELEMENTS OF POLITICAL ECONOMY. 

has a perfect right to quit. All this is legitimate 
and fair and above board. 

But a strike is wholly different. This brings com- 
pulsion into play. A combination among workmen 
to leave an employer in the lurch, and especially a 
combination which forces into its ranks by cajoling 
or menaces, those who are unwilling to join it, is of 
itself a confession of the injustice of the claim. If 
the claim be just, there is no occasion to extort it. 
If the value of the service rendered be equal to the 
sum demanded, if this can be obtained elsewhere, 
there is no need of consultation and conference, com- 
bination and conspiracy. Let each man go quickly 
where he can get the most for his service. The fact 
that this is not done, that means are brought to bear 
upon the employer which are not ordinarily used in 
bargains, — means of the nature of a threat — that 
the justice of the claim is not relied on in a case 
where, more than anywhere else, justice can enforce 
itself, that full and free explanations are not had, 
that no notice is given, that great damage is ex- 
pected by their action to accrue to the employer, all 
this seems to forget that the transaction between 
employers and employed is a case of pure exchange, 
a simple bargain of one service against another ser- 
vice. Therefore, I say, that strikes are false in 
theory. 

But this is not the worst of it. Strikes are per- 
nicious in practice. And the grand reason for this 
is they tend to lessen the wages-fund. The produc- 
tion of all material commodities is a joint process. 
Capital and labor both conspire in it. The gross 
returns belong wholly to the capitalists and the labor- 



ON LABOR. 147 

ers. The profits of capital and the wages of labor 
are paid out of these returns and from no other 
source. It is for the interest of both capitalists and 
laborers that these returns be as large as possible, 
because they are wholly divided between the two, 
and if the whole be large the parts will also be large. 
Profits being taken out, the rest is wages-fund ; or, 
more strictly speaking, wages-fund being taken out, 
the rest is profits. It makes no difference practically 
that the wages have been advanced to the laborers 
while the production was still going forward, since 
the wages really come out of the proceeds of the 
joint process. The capitalist never means to pay 
wages out of his previous accumulations, and ought 
not to be expected to do so, and were he obliged to 
do so, it would soon be worse for the laborers, since 
these accumulations are the only stock which sup- 
ports labor. It is not only just but needful for the 
laborers, that wages shall be paid out of the pro- 
ceeds of that on which labor is now expended. 
"Whatever, then, tends to lessen these proceeds, 
necessarily lessens the wages-fund. Any interrup- 
tion of the process of production by strikes, any 
want of full and hearty cooperation between the two 
parties to the joint process, will, if continued, infalli- 
bly make the wages-fund smaller. 

Suppose it takes three months to realize the re- 
turns in some branch of manufacture. If, when the 
workmen are paid off at the end of one three months, 
they all strike at the beginning of the next, and both 
parties hold out for three months, what is now the 
chance for higher wages ? It shall go hard even if 
they get as much as before. And whv ? Because 



14:8 ELEMENTS OF POLITICAL ECONOMY. 

the mill has stood idle, and the owner has lost three 
months' profits on the whole investment connected 
with the mill. They have lost wages for three 
months, and now when they come to begin again, 
they may not be able to wait, as before, till the end 
of the cycle, and their wages must be advanced out 
of a fund smaller than it would have been but for 
the strike. The employer usually advances wages 
out of his own, or borrowed capital, expecting to be 
repaid from the results of current work. Sometimes 
his mere expectation of large returns acts favorably 
on the wages-fund. But this employer has lost 
profits and customers by the strike, and his business is 
disarranged. His workmen by inflicting a loss upon 
themselves have found an opportunity of inflicting 
a loss upon him. Their loss is undoubtedly the 
greater of the two. Therefore, I say, strikes are 
commonly, and almost necessarily, a disadvantage 
to the workmen themselves. The case just put is a 
strong case to show the principle involved, but all 
interruption whatever to the processes of production 
by strikes, all consequent embittered relations be- 
tween employers and employed, all want of hearty 
working together of the labor with the capital, tend 
to diminish the gross returns, and consequently, both 
the wages-fund and profits. As far as this point is 
concerned, there is no sense or reason in the common 
jealousy of workmen towards employers. There is 
no real antagonism between them. Their interests 
lie along the same line. They are partners in the 
same concern. Workmen who are intelligent, pru- 
dent, skilfal, will infallibly get their due. Employ- 
ers who are humane, urbane, fair, will find their 
account in it. 



ON LABOR. 149 

In discussing labor and wages, it will be noticed 
that 1 have made no reference to a subject a good 
deal agitated at present in Europe and somewhat 
also in the United States, namely, to cooperation. 
This is a scheme originating with laborers them- 
selves, under which they combine, either to purchase 
their necessaries in common and hence at cheaper 
rates because avoiding all profits of middle-men ; or, 
more especially, to engage in joint production, the 
workmen furnishing the capital, all being copartners, 
and of course all sharing pro rata the profits of the 
concern. All this is well; and in countries where 
laborers are under traditional disabilities, it may be 
very promotive of their welfare ; but any one can see 
that no new economic principle is involved in it. 
The workmen unite the character of capitalist and 
laborer in their own persons, and both receive wages 
and share profits; but the principles which determine 
the amount of each are the same as if the two went 
in opposite directions. The practical success of the 
scheme will depend in each case upon the question 
whether there be any of the workmen of sufficient 
organizing and executive ability to carry it through. 
Workmen should have a chance to do this every- 
where : it is done essentially whenever two or more 
workingmen organize a firm to carry on any busi- 
ness. In the United States the greatest freedom 
prevails ; there is nothing to hinder any laborer from 
becoming a capitalist ; nearly all our capitalists were 
formerly laborers ; the savings-banks are open for the 
smallest gains ; and the shares of most joint-stock 
companies are open to everybody who has means to 
buy them. There is only one consideration that 



150 ELEMENTS OF POLITICAL ECONOMY. 

seems to justify in this country any special jealousy 
of laborers as such, towards capitalists as such ; and 
that is the fact, that the legislature does sometimes 
confer, by means of corporate charters, and other- 
wise, certain extraordinary rights upon capital. So 
long as capital and labor rest solely upon their nat- 
ural rights, neither can have the advantage of the 
other; but so far forth as advantage is given to capi- 
tal by law, it is unjust to labor, and ought to be 
vigilantly watched and counteracted by laborers. 
The legislature, whether state or national, cannot be 
too scrupulous in this whole matter. The limits of 
legislative action upon economical subjects are pretty 
narrow. Capital and labor should both have the 
utmost liberty of action compatible with social 
security ; and the equal rights of each will in gen- 
eral best be reached by leaving both to take care of 
themselves, subject only to general laws relating to 
person and property. For the legislature to dictate 
to adult laborers the number of hours per day they 
shall work, is no better and no worse than to dictate 
to the capitalists the rate of wages they shall pay. 
To do either is an economic abomination. 



ON CAPITAL. 151 



CHAPTER VII. 

ON CAPITAL. 

The three requisites of production are labor, 
power-agents, and capital. Of the first we have 
now learned what can be learned, without attending 
in turn to its counterpart — capital ; of the second 
we have learned already that all the powers of Nature 
work gratuitously in the service of man ; and of the 
third, we are now to learn what it is, how it arises, 
how it works, and what its influence is upon the 
progress and amelioration of society. Political econ- 
omy is able to show that there is no natural opposi- 
tion of interest between capitalists and laborers ; 
that capital is just as dependent on labor as labor is 
dependent on capital ; that each is equally interested 
in the prosperity of the other, and that thus a deep 
and admirable harmony subsists in this part, as in 
every other part, of the social organism. 

Capital is any product reserved to be employed in 
further production. This definition will be found to 
cover all the cases, to obviate many difficulties, and 
to take the life out of many disputes. Mr. Carey de- 
fines capital as the instrument by means of which 
man obtains mastery over Nature, including in it 
the physical and mental powers of man himself, 
and thus needlessly confuses the boundaries between 
capital and labor. It is much simpler and better to 



152 ELEMENTS OF POLITICAL ECONOMY. 

define labor, as has already been done, as physical 
or mental exertion for the sake of a return, and to 
define capital, as is now done, as any product out- 
side of himself reserved by man for further produc- 
tion. There are many products devoted to immediate 
consumption ; that is to say, to the gratification of 
present desires, without any reference to the render- 
ing of future services by means of their help. Such 
products are not capital. They are a portion of the 
wealth of the community, they are valuable, but 
capital they are not. All capital is wealth, but all 
wealth is not capital. Only that portion is capital 
which employs, assists, and pays for labor. All raw 
materials are capital, all machinery is capital, all 
funds destined to purchase these, and all funds des- 
tined for wages, are capital. As all values reside in 
services exchanged, so all capital resides in services 
accumulated with reference to an ultimate exchange. 
It is only in the intention of the owjier that capital 
can be discriminated from other products destined 
by him for the gratification of himself and his family, 
or for benevolent purposes. Take a hardware manu- 
facturer, for example, and he has a stock on hand of 
finished hardware, a part of the proceeds of which 
he will put back into his business in the form of 
materials, togls, and wages, and another part will go 
in the form of personal and family expenditure, and 
it is only his intention that discriminates the first 
part, which is purely capital, from the second part, 
which, as far as he is concerned, is not capital at all. 
It may indeed become capital in the hands of those 
to whom he pays it out ; and will become so, in case 
they destine it as an aid to fm'ther production in 



ON CAPITAL. 153 

their several lines of business. The whole mass 
of capital, then, in any country, is the whole mass of 
those products, of whatever kind, which are destined 
in the mind of their owners to be retained as an aid 
towards rendering future services to society. 

How does capital arise? We have seen that 
there are obstacles which lie in the way of the grati- 
fication of men's desires in all directions, and that 
these obstacles can only be removed by human effort. 
When a man devotes himself to one set of these , 
obstacles, with a view to surmount them, he is not 
long in discovering, that if he had certain tools, his 
work would be greatly facilitated ; and having dis- 
covered that, it will not be long before he will at- 
tempt himself, or induce others to attempt, to invent 
such tools. The beaver gnaws down the tree with 
his teeth, from generation to generation ; but man is 
a being more nobly endowed than the beaver, and 
no sooner had he occasion to fell trees, than some- 
thing of the nature of an axe suggested itself to his 
ingenuity. It is true, that his earliest attempts at 
axe-making were probably of the rudest sort, but 
just as soon as anything was devised, whether of 
flint or shell or metal, that rendered easier the labor 
of felling a tree, capital made a beginning along that 
line of obstacles. Among the more gifted races, 
progress in this direction was perhaps more rapid 
than we are wont to think it was, since Tubal-cain, 
even in the times before the flood, is said to have 
been " an instructor of every artificer in brass and 
iron." At any rate, we are at no loss to explain the 
origin of capital : it is found in the motive that 
exists everywhere, and that always existed, to lessen. 



154 ELEMENTS OF POLITICAL ECONOMY. 

if possible, a given irksome effort that is the condi- 
tion of a given satisfaction. And this origin of 
capital gives the key-note to its universal use and 
indefinite expansion. Tools are invented and era- 
ployed for no other reason than this, that, by means 
of their help, the human effort is lessened relatively 
to a given satisfaction. The powers of Nature, 
which grow the grain, which brings down the tree, 
which turns the wheel, which impels the locomotive, 
which sends the message round the world, all stand 
ready to slave in the service of man ; but in order to 
make their aid available for human purposes, there 
must be a plough, an axe, a wheel, an engine, an 
electric machine. These, and all other implements 
whatsoever, from the tiniest needle to the most pon- 
derous engine, are products created and retained for 
the sake of further production. They are capital. 
They are not capable of yielding in themselves 
an ultimate satisfaction to human wants, but they 
mediate between the powers of Nature, which they 
enable us to make available for our purposes, and 
those ultimate satisfactions. Nature furnishes all 
the powers, and . all the natural qualities of objects, 
but labor can go but a very little way towards 
making these available for the satisfaction of human 
wants, without the aid of implements and contri- 
vances which are produced by labor ; and which, 
being retained as an aid to future labor, are capital. 
Since it requires tools to make tools, the progress of 
capital at first was very slow ; but, since every ad- 
vance in mechanical contrivance makes still further 
advances easier, there is a natural tendency, which 
facts abundantly exemplify, to a more and more 



ON CAPITAL. 155 

rnpid progression in the number and perfection of 
all implements of production. The same motive 
that impelled to the first invention, has impelled to 
the whole series of inventions since, and will con- 
stantly impel to further inventions till the end of 
time. This motive, — and there is no motive that 
actuates man more universal, — is, to lessen the 
onerous effort of human muscle, and to throw upon the 
ever-willing shoulders of Nature more and more of the 
burden of production. Every step of this progress 
gives birth to a larger and larger proportion of satis- 
factions relatively to efforts ; marks an increasing 
control on the part of man over the powers of 
Nature; and gives promise for the time to come of 
greater advantages still in both these two directions. 
And it is because capital brings gratuitous natural 
forces. into service, and the more so as capital pro- 
gresses, that the value of those things created by the 
aid of capital tends constantly to decline as com- 
pared with the value of those things, in whose pro- 
duction capital less conspires ; and in the chapter 
following the next will be developed from this point 
one or two important laws of value. 

Now, then, having seen what capital is, and the 
human motive that brings it forward in production, 
we next inquire after its remuneration. The remu- 
neration of capital is technically called profits : just 
as wages are technically the remuneration of labor. 
The present proposition is, that profits are the legiti- 
mate reward of a service, just as much, and in the 
same sense, as wages are the legitimate reward of a 
service. The distinctive service of the capitalist as 
such, as distinguished from the service of the laborer, 



156 ELEMENTS OF POLITICAL ECONOMY. 

consists in his voluntary abstinence from the use and 
enjoyment of that which he contributes in aid of 
further production. If a man puts a thousand dol- 
lars, which he might spend upon his immediate 
gratifications, into a machine to be used in his busi- 
ness, the money immediately becomes capital; the 
owner practices abstinence, and for this abstinence 
justly expects a reward. This reward we call profit. 
The expected profit is the only motive for the absti- 
nence. He will not be content simply to get his 
thousand dollars back, for that he has now: he must 
have his thousand dollars with a profit. Suppose A 
to be a manufacturer of flax fabrics, B to be a farmer 
in his neighborhood, and C an expert mechanic ac- 
quainted with the current modes of spinning and 
weaving flax. A has a capital of $10,000 invested 
in his business, in buildings, machinery, materials, 
and wages-fund, which nets him $1000 a-year clear 
profit. At the end of the year, the question with 
him is, whether he shall spend this $1000 unproduc- 
tively in immediate gratifications, or, adding it to 
his capital stock, increase his business with it. If 
he concludes to do the latter, he must forego the use 
and enjoyment of his $1000 for the present, he must 
practise abstinence ; and this he will not do, and 
ought not to do, except in view of increased profits 
to accrue from his business at the end of the next 
year. If more flax is to be spun and woven in his 
factory, more money must be invested to buy more 
materials, to pay more laborers, or to pay for more 
or better machinery. His contribution to the pro- 
spectively increased production is $1000, transformed 
by his intention fi:om simple property to capital, 



ON CAPITAL. 157 

devoted to production by a voluntary abstinence 
from its present use and enjoyment, in view of a 
future reward or profit. It is a service rendered by 
one man to a joint process to be performed by many, 
and gives him a just claim to a portion of the prod- 
uct. Is exertion irksome ? So is abstinence. Are 
wages legitimate ? So are profits. B as a farmer 
might devote all his fields to growing food and fruits 
for the gratification of himself and family, but since 
A now wants more flax fibre for his factory, he gives 
up a part of his acres to growing flax, and this be- 
comes a part of A's capital in the form of raw ma- 
terial ; and the money received for it may become 
capital in B's hands by being spent either in agricul- 
tural improvements, or in buying additional land. 
The mechanic C, by giving time, exertion, and 
money to the work, may invent an improved ma- 
chine for spinning flax, to be introduced into A's 
factory. The machine becomes a part of A's capital, 
and the money paid to C for his machine is partly 
wages, a reward for the labor bestowed on its con- 
struction, and partly profits, to replace to C the 
money used in making the machine, together with a 
reward for his abstinence from the use of this money 
until the machine was sold. Thus we see that capi- 
tal, whether in the form of wages-fund, materials, or 
implements, is always the result of abstinence ; and 
that whoever abstains from the present enjoyment of 
anything, in order that that something may contribute 
to a future production, renders an essential service ; 
and, consequently, that the reward of such absti- 
nence, or profit, is just as legitimate as are wages. 
This is very clearly seen in the common case in 



158 ELEMENTS OF POLITICAL ECONt>MY. 

which one man loans capital to a second, to be used 
by that second in his own business. Brooks has a 
thousand dollars in hand which he is at liberty 
either to enjoy un productively, or to employ himself 
productively, with the assurance of a profit; but is 
willing to forego the use of it for a year in favor 
of Smith, who is anxious to enlarge his business. 
Brooks' abstinence is a clear service to Smith ; and 
at the end of the year, therefore, Smith not only 
refunds the thousand dollars borrowed, but also sun- 
dry other dollars besides as a specific reward for this 
specific service. If Smith keeps the money ten years 
or twenty, it is no more than just that he should pay 
this sura every, year till the principal is refunded, 
because the service is every year repeated, the ab- 
stinence is still practised in his favor. Therefore, 
capital once acquired by abstinence, becomes, if the 
abstinence be continued, a legitimate source of per- 
petual revenue to the owner, as well as a perpetual 
source for the maintenance of laborers. Whoever 
transforms his property into capital, establishes there- 
by a permanent fund whence he may draw an in- 
come, and laborers support, in perpetuity; because 
the capital, though constantly disappearing in pro- 
duction, as constantly reappears in products, with 
profits added : a fact which shows the folly of the 
popular opinion which regards more favorably the 
man who spends his money freely and unproduc- 
tively, than the man who, turning his money into 
capital, building a mill, or making other permanent 
investments, creates by that means a fund in the 
community, out of which permanent wages and 
permanent profits can- be paid. The strength of the 



ON CAPITAL. 159 

motives to abstinence in any country will depend 
largely upon the character of the government, and 
the organization of society there ; these motives 
being generally strongest where liberty of action, 
equality of privileges, and security of property are 
the greatest. 

We turn now to the relations of capital to labor, 
and to that law of the distribution of the products 
between capitalists and laborers, which w^as first 
promulgated by Mr. Carey, and which of itself fully 
justifies his claim to be regarded as an important 
contributor to the science of Political Economy. As 
I regard some of the positions of Mr. Carey as fun- 
damentally erroneous, and shall freely animadvert 
on them in that view, I wish at -this point to bear 
testimony to his great merit as the .original dis- 
coverer of the beautiful law of distribution, in the 
light of which the future condition of the laboring 
classes in all countries, if they are only true to 
themselves, seems hopeful and bright. Capitalists 
are interested in profits, and laborers are interested 
in wages ; is there, then, as is commonly supposed, 
a deep-seated antagonism between them ? None 
whatever. No profits can be realized unless labor 
be united with the capital, because it is labor alone 
that works up the raw materials, tends the ma- 
chinery, and disposes of the products. Capital not 
united to labor remains barren, giving birth to no 
profit, nay, itself commonly becoming less. At any 
rate, the idle mill and hoarded gold yield no profit. 
Without the profit there will be no capital ; since 
no man will practise abstinence without the hope 
of a reward : but without the labor there will be no 



160 ELEMENTS OF POLITICAL ECONOMY. 

profit ; and therefore the very presence of capital in 
any community, constitutes of itself a demand for 
labor. The more of capital in any community, the 
greater the demand for laborers, since it is through 
laborers alone that the profits are realized. But the 
greater the demand for laborers, the greater the re- 
ward of labor ; and, therefore, laborers as such, are 
interested in nothing so much as in the increase of 
capital, and in the strength of those motives to ab- 
stinence, out of which capital springs. 

Capital must have laborers. Laborers desire re- 
munerative employment. It is the old case of values 
over again. Labor offers a service to capital, and 
capital offers a service to labor. They exchange to 
the mutual advantage of both, and one is as inde- 
pendent as the other. The workmen may hold up 
their heads. They offer an honorable service on 
which capital is absolutely dependent for its exist- 
ence. They offer a service as legitimate and as 
respectable, as that of the clergyman who preaches 
their sermons and baptizes their children, and are 
paid on precisely the same principles. Let no em- 
ployer feel too much exalted towards his workmen. 
The money he renders them is no whit better than 
the work they render him. The exchange is honor- 
able, and the parties to it on the same level of ad- 
vantage. They are as necessary to him as he is 
necessary to them. As a capitalist he cannot exist 
without them ; as laborers they cannot exist wdthout 
him. He is one blade of the shears, they are the 
other blade, and it takes both blades to cut. It is 
absurd to ask which blade cuts most, because there 
is no cutting at all, unless both blades work together. 



ON CAPITAL. 161 

More than this. Capital and labor are not only- 
essential to each other, but also each is bettered by 
the prosperity of the other. If capital realizes a 
good round rate per cent., every capitalist is anxious 
to enlarge his business, whether as lender or active 
operator, and employ as much of his wealth as pos- 
sible, as capital. This process increases capital. If 
men constantly put their profits only back into their 
business, which, under a high rate per cent., they 
will be pretty sure to do, capital rapidly increases. 
But increase of capital is, in its very nature, an 
increased demand for laborers. An increased de- 
mand for laborers, other things being equal, infal- 
libly raises wages ; just as an increased demand for 
anything else raises its value. Therefore, laborers 
are directly interested in the prosperity of capital, 
because the prosperity of capital leads to its in- 
crease, and its increase leads to higher wages. As 
a matter of fact, high profits and high wages, so far 
from being incompatible, usually accompany each 
other. • 

But is the capitalist equally interested in the pros- 
perity of laborers ? I think so. That he has to pay 
high wages is not necessarily a dead loss to him. 
This is no game of grab, in which what one gains 
another loses ; it is a case of joint production, in 
which two parties conspire, and in which whatever 
helps to enlarge the gross amount produced, helps to 
increase the share falling to each party. If then, as 
they undoubtedly do, high visages tend to make the 
workmen more intelligent, industrious, frugal, and 
inventive, they are not a loss to the capitalist, but a 
gain. Larger gross returns are thereby secured, 
n 



162 ELEMENTS OF POLITICAL ECONOMY. 

Improved intelligence and skill of workmen affect 
production, just as improved machinery, secured by 
the aid of capital, affects it. Both alike enlarge the 
aggregate of products to be divided between capi- 
talist and laborer. Now, in the division of products 
thus rendered larger in amount, what hinders capital 
from getting a fair share ? When a firm is prosper- 
ous, are not all the partners benefited ? All that is 
produced is to be divided ; if more is produced, 
more is to be divided. Intelligent, industrious, skil- 
ful workmen, are best for production, are best for 
the capitalist, and therefore, high wages, which tend 
to make them so, and which are a consequence of 
their being so, are to be paid without grudging. 
When the matter is sifted to the bottom, it is seen 
that capital is as much interested in the prosperity 
of labor, as labor is interested in the prosperity of 
capital. All legitimate interests are in harmony. 

I am now prepared to prove that all increase of 
capital, while it redounds to the benefit of capital- 
ists, redounds in a still higher degree to the benefit 
of laborers. The demonstration is Mr. Carey's, and 
is the law of distribution above referred to. The 
proof is this. The rate per cent, of profits invaria- 
bly goes down as a country grows older and richer. 
This is a simple fact of history, which no one will 
dispute. It has been exemplified alike in ancient 
and in modern times, so that one is at a loss whence 
to take the best examples, when all the examples are 
so good. In England, three centuries ago, the legal 
rate of interest was ten per cent., while now the 
average rate is barely four in that country, and 
lower still in Holland. During the first years of 



• ON CAPITAL. 163 

mining operations in California, from eight to fif- 
teen per cent, a month, with security of real estate, 
was paid for the use of money, which enormous 
rates have now declined to rates not much higher 
than those paid in the States along the Mississippi 
River, and in these also ^ the rates are constantly 
approximating those current in the older Eastern 
States. It may be assumed, therefore, as an indis- 
putable fact, that, as capital increases, the rate per 
cent, for its use tends steadily to decline ; but, while 
less profit is received on every hundred, there are also 
more hundreds, and consequently, there is an abso- 
lute gain to capitalists as a class, and both an abso- 
lute and relative gain to the laborers. Let us take to 
figures. Let §100,000,000, while the rate of profit 
is six, and §500,000,000, when it has fallen to four, 
be expended in payment of simple wages. The value 
of the products to be divided at the end of the year, 
will be represented respectively by §106,000,000 and 
$520,000,000. In the first case, §6,000,000 is profits, 
and §100,000,000 is wages. In the second case, 
$20,000,000 is profits, and §500,000,000 is wages. 
Here is an absolute gain to capitalists. Profits have 
gone up from six to twenty millions, are more than 
three times as great as before. But wages have gone 
up both absolutely and relatively. They have risen 
from one hundred to five hundred millions, and are 
five times as great as before. Profits have risen in 
the ratio of one to three, but wages in the ratio of 
one to five. This arithmetical example is put for 
the sake of illustration, but the principle holds good 
in every case where the rate per cent, goes down 
in consequence of the increase of capital, and there- 



164 ELEMENTS OF POLITICAL ECONOMY. 

fore the advantages of ever enlarging capital are 
even greater to the laborers as a class than to the 
capitalists themselves. Most assuredly, if capital 
now takes less out of every hundred, more is left to 
labor. Profits and wages are reciprocally the leav- 
ings of each other, since- the aggregate products 
created by the joint agency of capital and labor are 
wholly to be divided between them. This demon- 
stration is extremely important; for it proves beyond 
a cavil, that the value of labor tends constantly to 
rise, not only as compared with the value of the 
material commodities which, by the aid of capital, 
it helps to create, a truth we have seen before, but 
also as compared with the value of the use of its 
co-partner capital itself; and therefore, that there is 
inwrought in the very nature of things a tendency 
towards equality of condition among men. God 
has ordered it so. Self-interest is indeed the main- 
spring of movement in the economic world ; but no 
man can labor intelligently and productively under 
its influence, without at the same time benefitting 
the masses of men. His very savings, productively 
employed, are the poor man's wealth. 

It only remains to speak of the forms which capi- 
tal assumes, and to divide these, in general, into 
circulating and fixed capital. Circulating capital 
comprises all those products, the returns for the sale 
or consumption of which are derived at once and 
once for all. Such are generally (1) all raw materials ; 
(2) funds destined for wages; (3) completed products 
on hand for sale ; and (4) all commodities bought and 
held for the sake of 'resale. Fixed capital comprises 
all those forms of capital which are purchased or held 



ON CAPITAL. 165 

with a view of deriving an income from their use. 
Such are generally (1) all tools and machinery ; (2) all 
buildings used for productive purposes; (3) perma- 
nent improvements in land; (4) all investments in 
aid of locomotion, such as railroads, canals, ships, 
and everything subsidiary to these ; (5) all products 
loaned or rented, or retained for that purpose; and 
(6) the national money. " The test of fixed and cir- 
culating ca|iital is the inquiry, Are returns secured 
by the retention, or by the transfer, of the particular 
product ? Tools in the hands of him who uses 
them are fixed, in the hands of him who manufac- 
tures them, circulating capital." ^ 

As civilization advances, and the aggregate of all 
forms of capital enlarges, there is a tendency towards 
a relative increase of fixed capital, as compared with 
circulating. This disproportion wouid become gi-eater 
than it actually does become, were it not for the fact 
that almost all forms of fixed capital are subject to a 
rapid deterioration of value, due partly to usual wear 
and tear, and partly to the progress of improvements, 
in consequence of which, what is old soon becomes 
antiquated. In nothing, perhaps, is actual cost of 
production so useless a guide to present value, as in 
machinery, and other forms of fixed capital. New 
and easier methods are being constantly invented, 
and the result of their introduction is to lessen the 
value of the old apparatus, and consequently to 
lessen the value of the aggregate accumulations of 
fixed, as compared with the current value of circu- 
lating, capital. Production looks perpetually to 
ends ; and estimates means just in proportion to 

1 Bascom's Political Economy, p. 71. 



166 • ELEMENTS OF POLITICAL ECONOMY. 

their present efficiency to reach the end proposed. 
. If the end can be reached by a cheaper process, in 
any department, the value of the former means will 
fall ; and the value of the former results secured by 
these means, other things being equal, will fall also. 
It has been estimated, that at the present time, the 
proportion of circulating capital to fixed in France, 
is one to eight ; in England, one to three ; in the 
United States, three to five ; proportions which are 
believed to be much higher in favor of fixed capital 
than formerly obtained in those countries.^ It is 
also worthy of notice that a too rapid and general 
conversion of circulating into fixed capital may 
prove temporarily injurious to large classes of per- 
sons. If all carriage-makers, for example, instead 
of selling their carriages outright, and making new 
carriages with the proceeds, should let them out on 
hire, receiving their value only in instalments, it is 
evident that they could not make so many carriages 
as before, and that their workmen would suffer by 
the change of method. So too, if, while a national 
debt is being contracted for war expenditure, general 
business become dull, and capitalists, preferring the 
steady income from the national bonds to the uncer- 
tain gains of business, largely invest their circulating 
capital in bonds, it is very clear that many laborers 
would suffer a disadvantage. In the same view, a 
mania for building railroads, or any other impulse, 
by which large masses of floating capital are sud- 
denly transformed into fixed capital, will surely be 
followed by some temporary distress. 

1 Carey's Social Science, iii. 56. 



ON LAND. 167 



CHAPTER VIII. 

ON LAND. 

The crucial test of a definition, a generalization, 
a theory, is found in those seemingly anomalous 
cases with which all science has to do, and which 
come with such apparent reluctance under her pains- 
taking classifications. If a definition given, or a 
generalization propounded, reduce into order these 
outlying cases without violence, as well as cover 
easily the more central phenomena, there is at once 
created a strong presumption of their truth. Does 
it cover all the cases ? Does it account for all the 
observed facts ? These are tests of definitions and 
of theories. The questions relating to the value of 
land and of its products have been among the most 
vexed questions of Political Economy, have exer- 
cised a vast amount of ingenuity, have led to careful 
and commendable observations and investigations 
in the whole field of agriculture, while the diverging 
views that have been taken, the arguments adduced, 
the conclusions drawn, and the spirit manifested, 
in these discussions, form the most unrefreshing 
portion of the history of the science. These ques- 
tions, however bitterly debated in the past, are 
approaching, even if they have not already reached, 
a satisfactory solution. The value of land and of 
the products of land have been almost uniformly 



168 ELEMENTS OF POLITICAL ECONOMY. 

■ regarded in the theories of wealth as anomalous 
matters, to which peculiar principles are applicable, 
and from which certain conclusions are deducible, 
which color and modify results and prospects in the 
whole field of value. Adam Smith, Ricardo, Mc- 
Culloch, Senior, and Mill hold substantially one set 
of views on land and its rent. Carey and Bastiat 
hold views on that subject almost totally at variance 
with the English writers ; it seems to me that the 
means are at hand for combining what is true in 
these opposing views in a clear and consistent man- 
ner, and for settling the dispute. I feel sure that 
both parties are right in many respects, and are 
wrong in some respects, and am not without some 
hopes of being able in this chapter to reconcile the 
difference, and to show that the value of land and 
the rent of land are not anomalous cases of value, 
but arise from human services rendered and ex- 
changed, just as all other value arises, and vary 
under the same laws as vary all other values. 
- A series of propositions, and discussions under 
them, will bring out what seems to be the truth in 
this whole matter. 

■ 1st. The whole earth with all its productive powers 
loas given to men gratuitously of God under the sim- 
ple direction that they replenish and subdue it. 

No provision was made for particular ownership. 
The whole earth, thus bestowed without partiality 
upon a whole race, had in all its spontaneous prod- 
ucts a great utility, but, for a time, no value what- 
ever. The spontaneous fruits, when gathered by 
any person, might become thereby possessed of value 
from his effort expended, but to the land itself, on 



ON LAND. 169 

which no human efforts had been expended, the 
idea of value could not have attached. No man 
would have thought to say to another under such 
circumstances, This field is mine : give me some- 
thing for it, and you shall have it ; and if he had, 
that other would not give it, because such fields 
were open on every hand to his occupation gratis. 
It is not in human nature to render anything for 
something which may be gratuitously obtained ; 
value has no place in a sphere where everything is 
free. But it is well worth while to notice, that under 
God's command, the earth was not only to be re- 
plenished but subdued. Under this word subdue, 
and under the work implied in that, came in the first 
idea of ownership in land. When a family com- 
menced this work of subjugation upon a piece of 
land, when they enclosed it, settled on it, tilled it, 
in any way whatever improved it by an expenditure 
of their own toil, then first dawned upon their minds 
the idea of possession, then first began the land to 
be possessed of value, since now the family would 
justly say to another, If you want this field, you 
must give us an equivalent for what we have ex- 
pended on it. If the transfer took place, is it not 
very plain that what was sold, was not the inherent 
qualities of the soil, but the services which had now 
been expended in its amelioration ? The first family 
received the soil and its powers gratuitously, and 
then expended a series of efibrts on its improvement; 
but a similar series of efforts bestowed on other gra- 
tuitous land in the neighborhood would make it as 
eligible as this now is ; if, therefore, the family in- 
sisted on more than an equivalent for their exertions 



170 ELEMENTS OF POLITICAL ECONOMY. 

actually bestowed on the land, the other would reply/ 
For as much labor as you have given to your land, 
we can make other free land as good as yours, con- 
sequently we can give you no more than a fair equi- 
valent for your efforts. The value therefore of the 
parcel sold, would be determined, not by the gratu- 
itous elements involved, but by the onerous elements 
involved, that is to say, by the efforts already made 
by the first family in connection with the land, as 
compared with the efforts of the second involved in 
the remuneration offered. It is not possible in the 
nature of things that God's bounty to the whole race 
should be thwarted by any number of individuals 
through exclusive appropriation on their part of this 
bounty. What they received gi-atuitously, they 
must gratuitously transmit; what they have wrought 
of permanent improvements on the land, they may 
justly demand a recompense for, and can secure it. 
By their expenditure of efforts they have saved to the 
purchaser a like expenditure of efforts, and for these 
they can demand, and he will be willing to concede, 
a recompense; but if they go further, and demand 
pay for the natural qualities of the soil which God 
gave and they have not improved, for the sun that 
shines, and the rain that falls on it, the demand is 
blocked at once by the common sense of the pur- 
chaser. He replies : There is land enough in its 
natural state, with inherent qualities as good as 
yours, the same sun shining on it, and just as much 
blessed rain falling on it, which I can have for noth- 
ing. I cannot give you something for that which 
costs you nothing, and which I can get for nothing. 
As long as there is abundance of land still open 



ON LAND. 171 

to occupation, everybody will concede that this line 
of argument is just, and that the general value of 
land cannot rise above the estimated measure of the 
human efforts actually bestowed on its improvement. 
Though less obvious at first, the principle is just as 
true after all the land has been taken up. Improved 
farms are always for sale in every country, lands 
once appropriated and ameliorated are perpetually 
changing hands, and men enough are always found 
willing to part with land, as with everything else, 
for what it has cost them. If some proprietors are 
unreasonable enough to try to intercept God's gifts 
bestowed alike on all the generations, and endeavor 
to exact a price for their land made up of compensa- 
tion for what they and their predecessors have done 
upon it, together with something added for what 
God has done for it, their cupidity is instantly 
thwarted by the readiness of others to dispose of 
their land for a fair equivalent of their onerous ex- 
ertions. Human motives are such, and everything 
is so providentially arranged in this department, that 
men cannot sell God's gifts ; it would be derogatory 
to the Giver, if they could. 

What might be thus inferred from the nature of 
the case, is abundantly confirmed by facts. As a 
matter of fact and experience, lands are absolutely 
valueless until some portion of human effort has 
been expended on them, or in reference to them. 
They may have utility, but they have no value. 
Nobody will give anything for them. The United 
States government has been selling for years some 
of the best lands in the world for one dollar and a 
quarter an acre, and this after the lands have been 



172 ELEMENTS OF POLITICAL ECONOMY. 

surveyed at go-C^ernment expense, local governments 
provided for the settlers, and mail facilities and otner 
privileges guaranteed to them. The same govern- 
ment is now giving away similar lands in home- 
steads to actual settlers, merely taking a nominal 
fee for the title-deeds, whose aggregate amount does 
not begin to meet the expenses incurred in connec- 
tion with these lands. If lands had value, indepen- 
dent of human exertions, then would the English 
companies and individuals who received grants in 
the seventeenth century of vast tracts of as fertile 
land on this continent as the sun ever visited in his 
diurnal revolutions, have become rich as Croesus ; 
but these companies and individuals did not become 
rich at all, but rather poor. The amount realized 
from the sale of their lands fell far short of reimburs- 
ing the expenses of colonization; and, after incurring 
debts and endless vexations, most of the companies 
and proprietors were glad to be rid of their lands at 
any price. It is a current proverb now in regard to 
wild lands at the West, that the more a man has of 
them the worse off he is ; and it is a maxim also in 
the newer settlements everywhere, that improved 
lands are worth the present value of the improve- 
ments and no more. And Mr. Carey is at pains to 
prove at great length that the value of lands in all 
old countries is now vastly less than they have cost 
of actual human efforts in their subjugation and im- 
provement ; less, because the progress of capital and 
inventions enables similar work to be done now at 
much less outlay. We conclude, then, that the value 
of land follows the law of all other values ; that it 
arises only in connection with human efforts ; that 



ON LAND. 173 

the utility in land sold is due in part to nature and 
in part to man ; that the utility from nature does 
not commonly affect price ; that landed property 
rests back, like all other property, its ultimate defence 
upon the right of making efforts for one's own welfare, 
and of not parting with these efforts except for an 
equivalent ; that land and the use of it have value 
because the proprietor can by them render a service 
to somebody else ; and finally that the value and 
the rent of land vary, like all other values, under the 
law of supply and demand. 

2d. The 'powers of all land, under more laborious 
culture, agricultural skill remaining the same, are sub- 
ject to the law of diminishing return; in other words, 
increased labor upon it, though increasing the aggre- 
gate return of produce, does not secure an increase 
proportioned to the increase of labor. 

This is the fundamental proposition on which 
Ricardo, and the English writers generally, lay such 
stress, and on which they found the law of Rent, and 
the necessity of restraints on population ; while 
Carey and Bastiat, impliedly if not expressly, deny 
the proposition, and of course, the inferences deduced 
from it. In my judgment, the proposition cannot 
be logically denied. The law of diminishing return 
from land is a. law of Nature, and has played a very 
important part in the occupation and culture of suc- 
cessive portions of the earth's surface. The proof 
of the proposition is all the better for being short. 
If by doubling the labor on a piece of land, double 
the produce could be secured, and by quadrupling it, 
quadruple, and so on, there would be no reason why 
any man should ever cultivate more than a square 



174 ELEMENTS OF POLITICAL ECONOMY. 

acre, or even a square rod. He has a strong motive 
to confine his culture to a small space, just so long 
as the amount of produce is in the ratio of the labor 
expended, because there is less locomotion of tools 
and fertilizers and crops. The fact that he extends 
his culture from one acre to another, and then to 
distant acres, notwithstanding the inconveniences 
and expense of transportation, is an irrefragable 
proof of the proposition in question. Increase of 
agricultural labor and expenditure on a given space 
of land will secure a larger amount of produce, but 
as a general law, the increased amount will not be 
proportioned to the increased expenditure. If it 
were thus proportioned, if the law of diminishing 
return did not exist, then, for purposes of agricul- 
tural production, a square acre is as good as a con- 
tinent. 

It is through this law of diminishing return, that 
the Creator has secured the gradual occupation hy- 
men of almost the whole earth. There is a strong 
tendency to leave the old acres to advance upon 
new, the old countries to emigrate to new, when- 
ever the returns begin to bear a more unfavorable 
ratio to the labor bestowed. The farmer will ad- 
vance from the first to the second acre as soon as 
he thinks that more produce can be obtained from it 
by a given amount of labor than can be got by a 
like expenditure of additional labor upon the first 
acre, allowance being made for the increased incon- 
venience ; and so, cultivation has gradually extended 
itself, and men have become dispersed over the whole 
earth. Other principles leading to dispersion have 
undoubtedly cooperated, but this is the fundamental 



on" land. 175 

one, operative at all times, changing the course of 
population, and consequently of empire. 

Mr. Carey seems to think that this proposition is 
dependent on another, and endeavors to break down 
this by an attempt to break down that other. That 
other proposition is, that in the course of occupation 
the best lands are entered upon first, and that after- 
wards recourse is had to the poorer soils. He at- 
tempts to prove that the exact reverse of this is the 
historical fact, that cultivation has always been 
begun upon the poorer soils, and that afterwards* 
the river bottoms and strong lands have been drained 
and cleared and tilled. This discussion, however 
interesting in itself, is irrelevant as far as the law of 
diminishing returns is concerned, because that law 
is nowise dependent on the order in which soils of 
different productive power are entered upon in cul- 
tivation; it is ti'ue of all soils, whether rich or poor, 
whether entered upon in the order of their fertility, 
or in the inverse order ; and I cannot help thinking 
that Mr. Carey puts upon this matter of the order 
of occupation, which he asserts has always been 
from the poorer to the richer soils, an estimation 
altogether disproportioned to its importance. When- 
ever men have entered upon new countries, they 
have undoubtedly selected those lands first which 
seemed to them most eligible, reference being had 
of course to their present means of subduing them ; 
and whether these lands proved ultimately to be 
better or worse than other parcels which they might 
have chosen, is a point, which, however determined, 
has no effect to disturb the fundamental proposition 
in hand. 



IT 6 ELEMENTS OF POLITICAL ECONOMY. 

2d. The operation of the law of diminishing- returns 
is retarded by all improvements in agriculture. 

The discovery of new and nacre available fertil- 
izers, the invention of better agricultural implements, 
the light thrown by chemistry upon agriculture, the 
consequent adoption of better methods of culture 
and rotation of crops, the more perfect adaptation 
to the various soils of the kinds of produce sought 
to be raised from them, all these and similar im- 
provements tend to increase the ratio of the produce 
. to the labor, and disguise the law just established. 
The lands that are now under cultivation may be 
made, under more skilful modes of culture, to yield 
indefinitely more than at present, and the vast still 
uncultivated lands of the. world may come to render 
an incalculable quantity of food to the world's pop- 
ulation ; but yet, as improvements are naturally 
less continuous in this than in some other depart- 
ments of production, as invention has less play, as 
there is less opportunity for the division and cooper- 
ation of labor, as nothing can materially shorten the 
time during which the fruits of the earth must ripen, 
the value of agricultural products tends to rise rela- 
tively to manufactured products generally. Labor, for 
a reason already given, and produce, for the reasons 
now given, have risen and tend steadily to rise, as 
estimated in general commodities. 

^th. The rent of land is the measure of the service 
which the owner renders to the actual cultivator, and 
does not differ essentially in its nature from the rent 
of buildings in cities, or from the interest of money. 

Mr. E-icardo's famous doctrine of rent, is for sub- 
stance, this : there are some lands in every country 



ON LAND. 177 

whose produce just repays the expenses of cultiva- 
tion, and consequently yields no margin for rent ; 
and the cost of production on these rentless and 
poorest lands under cultivation, will determine the 
price of the produce ; and as there can be but one 
price in the same market, the produce raised on more 
fertile lands will be sold for the same price, and this 
price, besides paying the cost of production, will 
yield a rent rising higher according as the land is 
more fertile ; so that the rent paid on any land is 
always a measure of the excess of productiveness 
of that land over the least productive land under 
paying cultivation ; and therefore, an increased de- 
mand for food in consequence of increased popu- 
lation, and the higher price resulting, will force 
cultivation down upon still poorer soils, or else 
compel a higher culture for less remunerative returns 
on the old soils, according to the law of diminishing 
returns, which in either case will raise the rents on 
all the soils above that grade that just repays the , 
expenses of cultivation; so that it is the sole interest 
of landlords, as such, that population should be dense 
and food high, their interest being directly antago- 
nistic to that of the other classes of the community. 

This very ingenious and complicated theory, which 
is supported by many other authoritative names be- 
sides that of its author, is too mechanical and rigid 
to be a good scientific statement of universal facts. 
It is true that, if 150 bushels of wheat are raised 
each with x hours' labor, and 50 each with x ~{- y 
hours' labor, and 200 are wanted, the price of the 
whole, offered at once, will not be below the rate 

12 



178 ELEMENTS OF POLITICAL ECONOMY. 

X -]- y for the whole 200 ; but this fact is not suffi- 
cient to make the price of food and the rent of lands 
anomalous cases of value, and it never would have 
been supposed so, had not England been under infa- 
mous corn laws which forbade importations, and 
made everybody tributary to landlords. If a war 
breaks out, and the founders have only 150 cannon 
on hand, which cost x, and the order comes for 200 
to be delivered at once, of which fifty will cost x -\- 1/; 
the founders will as certainly be paid for the whole 
200 at the rate x -{- 1/. When the trade in corn is 
free, the Ricardo law of rent loses its formidableness, 
and the simple law remains, applicable to all prod- 
ucts that have a market-rate, that that rate must be 
sufficient to compensate the cost of that portion pro- 
duced with greatest difficulty, otherwise that portion 
would not be produced. Of course, those who pro- 
duce at the greatest advantage will realize extra 
gains from this market-rate, so far forth as their ad- 
vantage does not depress the market-rate. So far as 
lands are taken on shares, or on permanent leases, 
or so far as their products are exchanged directly 
against other commodities and services, the law of 
Ricardo has little application. As a matter of fact, 
too, there is often more than one price in the same 
market-town ; and prices, and especially prices of 
agricultural products, are varying all the while from 
other causes than those affecting the cost of produc- 
tion. The follov/ing seems to me to be the whole 
truth in regard to rent. That portion of utility in 
lands that is the free gift of Nature is mostly a com- 
mon factor eliminated from value by the action of 
competition, as in the horses and strawberries, by 



ON LAND. 179 

which illustration was made in the chapter on Value. 
A parcel of land of extraordinary fertility, or extra- 
ordinary beauty, or holding an extraordinary mine or 
water-privilege, is assimilated in the law of its value 
to other unique products. Its price, whether at sale 
or rent, is only gauged by the service which the 
owner can render the purchaser by it. Still, the 
efforts, care, and abstinence of its owners, or of oth- 
ers, have made up an essential part of the present 
utility of the parcel. Of such things no market rate 
can be predicated, because competition has no play. 
With these unimportant exceptions, the rent of lands 
is a simple recompense for the use of a productive 
instrument, made such by human efforts. The 
owner has become proprietor of all the results of the 
onerous exertions put forth upon that land, or in any 
connection with that land, and allows the lessee the 
use of these results. Because the owner practises 
abstinence in the lessee's behalf, rent is substantially 
the same as profits; and as gross profits include the 
wages of superintendence, so rent also partakes of 
the nature of wages, so far forth as the owner still 
takes an active supervision of his property. Prox- 
imity to markets, degree of fertility, state of improve- 
ments, and the variations of supply and demand, 
will influence rent. 

5th. That division of land is best for purposes of 
production, which gives farms approximately equal in 
size to the cultivators ; and the best tenure is the fee' 
simple. 

Taking the last part of the proposition first, the 
fee-simple is better for production than any other 
tenure, because when one owns the land he tills, he 
takes a greater interest in it, it is his own, he has a 



180 ELEMENTS OF POLITICAL ECONOMY. 

constant motive to improve it, to make the produc 
tion from it as great as possible, since all it pro- 
duces is his own. If men work from motives, and 
if the energy and persistence of the work be propor- 
tioned to the constancy and press of the motives, 
then will the fee-simple most certainly make the 
aggregate of produce greater than any other tenure 
of land. Moreover the fee-simple immeasurably 
improves the character of the cultivators. The 
masses of men are educated and developed by 
nothing so much as by the ownership of land. It 
tends to make them industrious, thrifty, indepen- 
dent, hopeful of the future, anxious to give their 
children better privileges, as well as better lands, 
than they themselves had. The testimony on this 
point is abundant from many countries, and it all 
goes to show that the peasant proprietor is a hap- 
pier and more virtuous, as well as a more industri- 
ous and productive man, than the mere tenant and 
farm-laborer; while similar testimony, as well as 
common observation, proves, that lands under the 
copyhold tenure, or leased at will, are far infe- 
rior in point of improvements and production, to 
contiguous lands held in fee-simple. Thfii zeal of 
absolute ownership, especially if it be a limited 
ownership, has been observed to produce almost 
magical effects, as well upon character as upon 
lands, transforming after a while the poorest into 
excellent lands, and thriftless and desponding labor- 
ers into frugal and enterprising proprietors. 

The practical play of the fee-simple draws after 
it such a division of lands into farms moderately 
large and approximately equal, as can be shown to 



ON LAND. 181 

be most favorable to the largest aggregate produc- 
tion. Wherever there is no primogeniture and no 
entails, and owners can consequently sell a part or 
all their lands, whenever it is their interest to do so, 
lands naturally fall into those hands which are most 
capable of using them productively, because such 
persons can afford to pay more for them than any- 
body else; and the division that follows this impulse 
of self-interest and this freedom of exchange is 
likely to be into farms tolerably equal in extent and 
moderately large. Such a division has naturally 
taken place in New England, in the Middle States, 
and at the West ; while in the South, the institution 
of slavery led to the system of large plantations 
and few land-owners, which system, I believe, will 
now, under the auspices of freedom, give way to the 
better system of small farms and numerous proprie- 
tors. That the latter system is more profitable in 
reference to production, as well as advantageous in 
point of national character and a broadly based and 
sound development of the national resources, is evi- 
dent from a few considerations, and has been exem- 
plified distinctly in the diverse experience in this 
respect of France and England. 1. When the 
mass of the agricultural population are owners of 
the soil they till, the motives to productive culti- 
vation are brought to bear most universally. These 
motives are interest and hope. There is a high 
pleasure in possession, and in self-guided exertion, 
a strong stimulus to get as much as possible from 
the land, and at the same time to keep good and 
ever improve its condition. When the great body 
of the land of any country comes under the action 



182 ELEMENTS OF POLITICAL ECONOMY. 

of such motives as these, then will the amount of 
production be the greatest. 2. Aristotle quotes from 
" the African " the saying that the best manure for 
the land is the foot of the owner; a saying which 
is often attributed to Dr. Franklin, and which is as 
true as if its origin did not date back some centuries 
before Christ. Franklin had read Aristotle. Personal 
supervision, to be most effective, must be limited in 
its sphere ; and the best agricultural knowledge and 
skill becomes comparatively weak when it attempts 
to exhibit itself on too broad a surface. Because a 
man can cultivate one hundred acres better than any 
of his neighbors, it does not prove that he will cul- 
tivate fifty acres additional to them better than a 
neighbor of inferior skill, who is the owner of those 
fifty and no more. 3. The possession of small free- 
holds educates and gives energy to the masses. 
That educates a man which calls forth varied efforts 
of intelligence and will. To protect and advance 
his own interests, to attend upon the seasons, to 
watch and wait, to foresee and plan and labor, all 
this will secure that a nation of freeholders will 
never be a nation of ignorant, indolent barbarians. 
4. National strength is best secured and main- 
tained wherever there is a broad basis of indepen- 
dent yeomanry to lean back upon when heavy taxes 
are to be raised and strong blows of battle are to be 
struck in behalf of the nation. 

France and England are instructive examples in 
this whole matter. In France, since the abolition 
of all entails and primogenital rights by the revolu- 
tion of 1789, and under the action of the law requir- 
ing the equal partition of a man's landed estate 



ON LAND. 183 

among his children, the lands- have become subdi- 
vided into small parcels, averaging about fourteen 
acres to each owner. Out of a population of 
37,500,000, 8,897,000, or nearly one fourth, are pro- 
prietors of land either in town or country. Of im- 
proved and unimproved lands there are in France 
about 122,500,000 acres owned by individuals. The 
number of different lots of land, how^ever, is about 
140,000,000, or considerably less than an acre,' on the 
average, to each lot. About ten of these lots, on 
the average, are included in one assessment of the 
land-tax; the whole number of such assessments 
being 14,123,117. Of these fourteen million as- 
sessed properties, more than seven million are worth 
less than $1,000 ; more than two million are worth 
between §1,000 and §2,000; nearly two million 
more are worth less than §3,000; while only 53,000 
properties are worth more than §100,000. The esti- 
mated value of all these lands is §31,000,000,000 ; 
and the annual net income §937,500,000. These 
figures, which are all taken from the official returns 
of the French government for the year 1866, are very 
significant of the beneficial results of the land sys- 
tem of France. In point of a regular increase of 
agricultural products, in point of an industrious, 
frugal, cheerful peasantry ; in point of a very general 
desire and ability to purchase land; in point of 
showing that subdivision ceases so soon as the lands, 
if divided further, would be less profitable in produc- 
tion ; in point of pauperism ; in point of national 
strength and weight, in spite of a centralized and 
repressive government; in point of an ability in the 
peasantry to loan to government, in an exigency, 



184 ELEMENTS OF POLITICAL ECONOMY. 

large sums of money in the aggregate ; a long expe- 
rience has shown that the practical workings of this 
division have been most happy. 

In England, on the other hand, the monster-farm 
system prevails, the small proprietors have mostly dis- 
appeared, the law of entails and leases ties up the 
landed estates from sale and division, less than 150 
persons own one half of all the lands in England ; 
and not more than ten or twelve persons are in pos- 
session of one half of all the land in Scotland.^ The 
national results of this system are what we should 
expect they would be. There are upper and middle, 
and lower and lowest classes, but a homogeneous 
English people are not to be found. Particular re- 
sults are seen, in part, in what has been justly called 
the irretrievable helotism of the laboring classes; in 
over one million and a quarter of paupers in Eng- 
land and Scotland alone in 1863 ; in an annual poor 
rate for that year in the three kingdoms of almost 
$40,000,000, raised by taxation ; in unmeasured in- 
equality in fortunes and comforts ; in the lack, felt 
alike in war and peace, of a large class of sturdy 
yeomanry, the strength of a State ; and in a conse- 
quent sinking of relative position, power, and influ- 
ence, former times being held up with the present, 
as compared with France and the other first-class 
powers. No degree of merit in the other parts of 
the English system, can ever compensate the want 
of just and broadly liberal laws of land. 

The " encumbered estates' law," applicable only to 
Ireland, passed by Parliament in 1848, had, so long 
as its practical operation lasted, the beneficial effect 

1 Speech of John Bright in Glasgow, 17th October, 1866. 



ON LAND. 185 

of increasing the number of proprietors in that 
island. Under this law there could be brought into 
market, in smaller holdings, estates encumbered with 
debt, and shut out from improvement. Thus mil- 
lions of acres of heavily mortgaged lands passed 
from their nominal owners into the hands of abso- 
lute proprietors, whose title is perfect because parlia- 
mentary, and whose interest and zeal are said to 
have changed the face of their lands. Mr. Bright is 
now agitating for the further improvement of Ireland 
a scheme by which it is proposed that a parliamen- 
tary commission should buy up the estates of the 
absentee landlords, and then sell them out in parcels 
or wholes to the actual tenantry, giving the latter 
time in which to pay for their lands. If this, or some 
similar scheme, should prevail, and Ireland should 
once more be owned by the Irish ; and if the Irish 
should be relieved of their forced tribute to the hated 
English Church, as they ought to be, the hope may 
be indulged that Ireland would speedily enter upon 
a period of substantial improvement and prosperity. 



18'6 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER IX. 

ON COST OF PRODUCTION. 

We are now in position to be able to analyze the 
cost of production, and to bring forward some sup- 
plementary matters relating to value, which could 
not be properly discussed, until the subjects of labor, 
capital, and land, were, at least in their ground prin- 
ciples, understood. While we were inquiring, in the 
chapter on value, whether such a thing as a measure 
of value were possible, it was remarked that some 
political economists have thought that the cost of 
production of any commodity is the most accurate 
measure of its general purchasing-power ; and it 
might have been added, that these writers consider 
that there is such a thing as natural value distinct 
from market value, that natural value is the cost of 
production, and that market value oscillates perpetu- 
ally around that, and tends constantly to return to it. 
How far these views are just, how far cost of pro- 
duction constitutes a law of value within the all- 
comprehending law of demand and supply, is the 
point to which attention is now directed. 

It is noticeable, that while almost all people put 
forth onerous efforts to satisfy the present and imme- 
diately prospective wants of other people, in view of 
receiving back from them corresponding efforts to 
satisfy their own present and immediately prospec- 



ON COST OF PRODUCTION. 187 

tive wants, there are some people, who have both 
foresight and capital, who set to work to make 
preparations in reference to services which they ex- 
pect to render some time in the future ; and it is 
evident that this matter of the cost of production 
has an especial bearing upon those classes of pro- 
duction in which permanent investments are made, 
looking to future rather than to present exchanges. 
It becomes necessary to attend to cost of production 
simply because cost of production is sometimes an 
exact measure of one of the elements out of which 
value springs, namely, the element of effort. When 
a surgeon, for example, charges fifty dollars for cut- 
ting off a man's leg, cost of production is an imper- 
tinent phrase in relation to such a service, and is no 
measure of the effort ; but when a capitalist invests 
$20,000 in a cutlery establishment, hires all his 
labor, and at the end of the year has produced 5000 
knives, cost of production has a definite meaning as 
applied to each one of the knives, and is an accu- 
rate measure of the one element of effort, which 
goes, together with other elements, to determine its 
value. It is not true at all that cost of production 
alone determines the value of the knife, or is a meas- 
ure of the value of the knife, but it is true that, in 
this case, and in all cases in which a commodity is 
produced by a definite capital invested for a fixed 
time, and by labor wholly hired, or estimated as 
hired, the cost of production is an exact measure of 
one of the four elements which go to determine 
value, namely, of one effort. Now let us suppose 
that when these knives are exposed for sale, no such 
return efforts are offered for them as are estimated 



188 ELEMENTS OF POLITICAL ECONOMY. 

by the maker as compensatory and remunerative. 
He may, in order to avoid a still greater loss, sell 
his knives below the cost of their production, but it 
is evident that he will not go forward at present in 
his enterprise of making knives. He will suspend 
operations, or withdraw from the business ; and his 
action in this respect will affect the supply of knives 
to lessen it ; and the next equalization of demand 
and supply will be likely to adjust a market value 
more favorable to knife-makers. Or if, when the 
knives are exposed for sale, they meet with an ex- 
change at very remunerative rates, our capitalist is 
now stimulated to increase his production, to put back 
his profits into his business, and perhaps to invest in 
it additional principal. His action in this respect will 
affect the supply of knives to increase it; and the 
next equalization of demand and supply, or if not 
the next, some subsequent one, will be likely to ad- 
just a new market value less favorable to knife- 
makers. Thus it is seen, that absolute cost of 
production influences value not directly, but re- 
motely, through its influence on supply. To sup- 
pose and to say that the cost of production of one 
commodity determines its value in an exchange with 
another, is to perpetuate the old mistake of ignoring 
the second commodity, is to reiterate the fallacy that 
value is an independent quality of one thing, is to 
confuse the whole subject of value. When the 
writers referred to speak of the " natural value " 
of any commodity, they mean its absolute cost of 
production ; but, at this stage of our inquiry, it 
surely cannot be necessary to repeat the thought 
already so often expressed in substance, that an 



ON COST OF PRODUCTION. 189 

analysis of one component part falls far short of de- 
termining the resultant of four component parts. I 
do not think the expression " natural \»alue " is cal- 
culated to be useful. From the very meaning of the 
word "value," if it is to have any consistent mean- 
ing at all, there can be no other kind of value than 
market value, that is, value in exchange. 

But while all this will doubtless be conceded to 
be just, there are other points of view in which the 
cost of production of any commodity comes to be a 
very important matter. From its obvious relations to 
supply, already exemplified, it is constantly, though 
indirectly, influencing the value of the commodity 
itself; and in respect to permanent investments, 
looking solely to future production, it becomes the 
main inquiry' ; because, while the cost of production 
can never determine the purchasing-power of the 
product, it is always one element in determining it; 
and also, especially, because the improvements which 
are all the time being introduced into the mechani- 
cal and other processes of such production, which 
improvements always tend to lessen the cost of the 
product, have the effect to lessen the value of all 
permanent investments, unless similar improvements 
be inaugurated in connection with them. The march 
of improvement is so constant, that old machinery 
and old processes are rapidly depreciated ; and a 
calculated cost of future production in one establish- 
ment is almost sure to be disturbed by new labor- 
saving inventions in other similar establishments, 
which will be able in consequence to offer the com- 
modity at a lower rate than the rate estimated ; 
in which case the value of the product will not con- 



190 ELEMENTS OF POLITICAL ECONOMY. • 

form to the estimated or even actual cost of produc- 
tion in that establishment, but will pitilessly fall to 
the point at which similar commodities are offered 
by the more fortunate producers. For these reasons 
we must inquire carefully after the elements of cost 
of production. 

These elements are two : cost of labor, and cost 
of capital. These are the only onerous elements 
that enter into production. Assisting the processes 
are, indeed, the natural powers of land, water, wind, 
steam, electricity, and so on, but as these are always 
gratuitous, they form no element of cost. Labor 
must have its wages, and capital must have its 
profits, and also a sinking-fund from which to 
replace the original capital when worn out or ex- 
pended. It will be in vain to search for any other 
ingredient of cost than these two.i 

1. By cost of labor is meant, of course, its cost 
to the employer, and not to the laborer himself, 
in reference to whom the phrase would have no 
definite meaning. Now, if we make an exhaustive 
analysis of the cost of labor to the employer, we 
shall find that there are three things, and only three 
things, that go to determine its cost. 1. Efficiency 
of. the labor. 2. The rate of nominal wages paid. 
3. The cost of that in which the wages are paid. 
To illustrate each of these in order: — If a capitalist 
hires two men to work for him at the same rate of 
wages, and if the one is twice as efficient a laborer 
as the other, the cost of his labor to the capitalist is 
one half less than the cost of the other's labor. The 
first element of the cost of labor is its efficiency. If 
a capitalist, accustomed to pay one dollar a day, is 

1 Compare J. S. Mill's Political Economy, book iii. chap. 4. 



ON COST OF PRODUCTION. 191 

now obliged to pay one dollar and a half a day to 
his laborers, their efficiency remaining the same, the 
cost of labor to him is just one third increased. The 
second element is nominal wages. If that com- 
modity, whether money or other, in which wages 
are paid, varies in cost to the capitalist, the cost of 
the labor compensated by that commodity, nominal 
wages and efficiency remaining the same, is varied 
thereby of course. We shall discover in the next 
chapter that the value of money is by no means 
invariable, as we have already learned the variable 
nature of all other values, and accordingly the third 
element of cost of labor is the cost of that in which 
the labor is paid. It is easy to see that there is 
nothing else, aside from these three things, that can 
ever affect the cost of labor. This analysis is noi 
given here for its own sake merely, but for some 
ulterior purposes, of which the first is to show, how 
various are the ingredients that enter into the com- 
putation which men ought rationally to make before 
engaging in extended enterprises of production. 
They must make calculations on the prospective 
cost of production, since that is one element that 
will determine the value of their future product. In 
doing this they must calculate the cost of labor, and 
the cost of capital ; and the cost of labor alone 
involves, as we have just seen, three variables, no 
one of which can be safely neglected in the sup- 
posed estimation. 

The second purpose is to explain from the analy- 
sis, that a great diversity of nominal wages may 
exist in different countries without necessarily affect- 
ing the cost of labor. If English wages, for exam- 



192 ELEMENTS OF POLITICAL ECONOM-y. 

pie, are, nominally, one half wages in "the United 
States, it is very poor logic to jump to the conclu- 
sion, that the cost of labor in England is one half 
less than in the United States. That will depend 
partly on the efficiency of the labor, and partly on 
the cost of that in which the respective labor is paid. 
If English laborers are only one half as efficient as 
American laborers, then a difference of one half in 
nominal wages, cost of money in the two countries 
being the same, will occasion no differeiice at all 
in cost of labor. Because nominal wages in Eng- 
land are lower than with us, many people think and 
maintain, that the English have an advantage over 
us, whereas it is notorious, and admitted even by 
themselves, that American labor is more efficient 
than English labor, and therefore there is no such 
difference in cost of labor as the difference in nom- 
inal wages would indicate, even if there be any 
difference in cost of labor at all. Just at this point 
great confusion has existed in the popular mind, and 
some by no means harmless fallacies are still current, 
arising from the want of a due analysis of the cost 
of labor. It is probable, all the elements being 
allowed for, that the cost of labor in one country is 
not very widely different from its cost in other coun- 
tries ; because, if there were much difference, there 
would be a greater difference than is actually ob- 
served in the rate per cent, of capital ; and this con- 
clusion is strengthened, when it is remembered, that 
in those countries in which the cost of labor is sup- 
posed to be low, as in England, the rate per cent, of 
capital is also low; and in those countries, as the 
United States, in which the cost of labor is sup- 



ON COST OF PRODUCTION. 193 

posed to be high, the rate per cent, is also high. 
Before leaving this point, I wish to remove one or 
two causes of misapprehension, which have fre- 
quently infected discussions of wages. The terms 
"high and low wages," are often used ambiguously; 
some meaning by the words, a high or low nominal 
rate ; 'others, a high or low degree of comforts en- 
joyed by the laborers, as the fruit of their wages ; 
others, still, as Ricardo, using the words high and 
low in relation only to profits, in which last sense, 
if wages are high, profits are low, and conversely. 
In the first two senses, wages and profits may both 
be high, or both be low, at the same time and place, 
but not in the last sense. "When the first sense is 
meant, the expression should be money ivages; when 
the second, real wages; when the third, relative 
wag^s. Had this nomenclature been adopted and 
consistently employed, many an angry dispute' and 
many a false conclusion would have been avoided. 
Also, it has been thought by some, that high money 
wages create high prices of commodities, that is to 
say, that things are dear because laborers have been 
paid a high price for their agency in producing them. 
This does not follow. Their labor may be very 
efiicient, and may be assisted by first-rate machinery, 
and the price of the commodities may be low, 
alth®ugh the money wages may be high. Money 
wages must not be confounded with cost of labor, 
because it is only one element of cost of labor. A 
higher cost of labor in any department of produc- 
tion, other things being equal, will tend to raise the 
price of the product, but not higher money wages 
alone. Price is value expressed in money, and gen- 



194 ELEMENTS OF POLITICAL ECONOMY. 

eral rise or fall of prices is usually due to changes 
in the currency. An inflated currency produces 
universally high prices, as well of labor as of com- 
modities, and for the same reason of labor as of 
commodities, and it is a superficial view which 
supposes, that, of these two effects of a common 
cause, one is a cause of the other. On the other 
hand it is sometimes supposed, that the exact re- 
verse of this takes place, and that money wages 
become high simply because the commodities which 
the laborers consume have become high. This is 
an error similar to the other. If an inflation of the 
volume of the current money of the country has 
supervened, then the price of labor rises by the same 
impulse that carries up the price of commodities. 
Both are effects; neither is the cause of the other. 
But if the currency has remained sound and stable, 
a high price of any of the commodities consumed 
by the laborers, has no tendency, that I can perceive, 
to raise the rate of money wages. The higher 
price of those commodities may have arisen from 
deficient harvests, or from a higher cost of labor in 
those departments, from inequality of taxation, or 
other similar causes ; but no one of these enables 
capital to share the gross proceeds of production on 
better terms with labor. Neither money, nor real, 
nor relative wages can rise, as I see, merely from 
high prices of the commodities which the laborers 
consume. It seems to me, accordingly, that much 
clear light is thrown from this analysis of the cost of 
labor upon the whole vexed question of wages. 

The third ulterior purpose of presenting this an- 
alysis is briefly to unfold the principles according to 



ON COST OF PRODUCTION. 195 

which the division between wages and profits is 
practically made. It was Mr. DeQuincy who first 
called profits the leavings of wages ; but this is only 
true when by wages is mr^ant tlie cost of labor. The 
gross products created by the combined action of 
capital and labor belong in common to the capital- 
ists and laborers, and are to be divided between them 
in some way, and the analysis in question enables 
us to perceive just how they are divided. Cost of 
labor being deducted, the rest goes to capital as a 
matter of course, and the proportion of this part to 
the whole capital marks the per cent, for the given 
time. If this part falling to capital is large for 
every hundred invested, the rate per cent, is high ; if 
small, low. The efficiency of labor and the state of 
the currency being as before, a rise of money wages 
will 'lessen profits, but no rise of money wages ac- 
companying increased efficiency of labor, or result- 
ing from inflated currency, has a tendency to lessen 
profits at all. The capitalist as such is interested in 
having cost of labor low, but not in low money 
wages necessarily, because a low cost of labor is 
consistent with high money wages, and with high 
real wages too. Very efficient labor may be very 
highly paid, and yet leave to capital a high rate per 
cent. We here see again from another stand-point, 
and from a deeper view, a truth we have seen before, 
that there is no real antagonism but a real harmony 
of interests between capitalists and laborers. Both 
are alike interested in the combined efficiency of 
capital and labor, that is to say, in the amount of 
gross products created; and, in respect to the divis- 
ion of this gross amount, there is no more collision 



196 ELEMENTS OF POLITICAL ECONOMY. 

of interest than in making the dividends of the year 
among the partners of a commercial house. The 
cost of labor must first be defrayed ; and this de- 
pends on its efficiency, its nominal rate of remunera- 
tion, and the present purchasing-power of money. 
What is left is gross profits, and the relation that 
this bears to the whole capital invested decides the 
rate per cent. So far of cost of labor. 

2. The second element in the cost of production 
is the cost of capital; and this also must be analyzed 
into three variables, no one of w^hich can be safely- 
neglected in a computation which has for its object to 
decide a prospective cost of production: — 1st, The 
rate per cent. ; 2d, The time for which the capital is 
advanced ; 3d, The form of the capital as liable to 
slow or rapid deterioration. We must look at the 
influence of each of these elements on xjost of pro- 
duction. 

(1.) Let us suppose that the rate per cent, at Am- 
sterdam is 3, and the rate at New York is 7, that 
the cost of labor is equal in the two cities, that the 
time of advance is one year, and that there is no 
liability of the capital to wear out ; a commodity 
made at Amsterdam with an outlay of f 100 can be 
sold for $103, while the same commodity made at 
New York with the same outlay cannot be sold for 
less than $107. The current rate per cent, is one 
element of the cost of capital, and through this, of 
the cost of production. 

(2.) The effect of the time of advance on cost of 
capital is more striking. Let the same supposition 
be continued, except that the time of advance in 
New York be extended to four years. The com- 



ON COST OF PRODUCTION. 197 

modity will sell in Amsterdam, as before, at $103, 
but in New York for not less than $131. This 
principle is well illustrated also in the case of wine, 
which to reach its perfection requires to be kept a 
number of years. Even under the same rate per 
cent, which we will suppose 6, a commodity made 
in six months with an outlay of $100 may sell for 
$103; while wine grown in the same six" months 
at the same outlay, kept five years, cannot be sold 
without loss for less than $133. If the period of 
advance be long, and the rate per cent, be high, the 
cost of capital from the two causes enhances enor- 
mously the cost of the product; so that, it is only 
countries like England and Holland, in which the 
rate per cent, is very low, which can successfully 
engage in enterprises requiring a large capital to be 
invested for long periods before returns are realized. 
This accounts for the fact that mining operations in 
Mexico and South America have been largely carried 
on by foreign rather than American capital. One 
million of Dutch capital at three per cent., expecting 
to realize returns only after twenty years, will be 
remunerated by a product selling for $1,806,111; but 
under like circumstances, American capital at seven 
per cent, must have a return of $3,869,685, or lose. 

(3.) Most forms of capital, especially that invested 
in buildings, machinery, and the like, more or less 
rapidly wear out, and a sinking-fund must be re- 
served from gross profits in order to replace the prin- 
cipal. This is the third element in cost of capital, 
and through this cost, influences the cost of produc- 
tion, and through cost of production, affects, in the 
manner already pointed out, the value of the prod- 



198 ELEMENTS OF POLITICAL ECONOMY. 

uct. Suppose there are two commodities A and B 
produced in two establishments, in each of which is 
invested a capital of $11,000, in one of which is a 
machine costing $1000, which is wholly worn out by 
one year's use, and in the other a machine costing 
the same sum, which will last however for ten years. 
Let the rate per cent, be ten, and the time consumed 
in completing the products be one year. There is a 
difference in the cost of capital in the two establish- 
ments, and this difference indirectly but immediately 
appears in the value of the respective products. To 
A must be charged not only $1100, the interest on 
the capital at the current rate, but also another 
$1000, wherewith to replace the machine already 
worn out by the year's production. A cannot be 
sold without loss for less than $2100. B however 
will cost less. To it must be charged, as before, 
$1100, current rate of profit on the capital invested, 
and only $100 to replace after ten years' use the 
machine. B therefore can permanently sell without 
loss for $1200. 

Now, then, if my readers are willing to follow me 
a little further along this dry and dusty road, we 
shall be able to draw some important conclusions in 
respect to value as depending on wages and profits. 
While we have been seeming to attend to only one 
of the four elements out of which value springs, 
namely, one effort, of which cost of production is 
always an exact measure whenever the effort is em- 
bodied in a commodity made jointly by paid labor 
and capital, we have really been attending to the 
other effort also whenever that effort is similarly 
embodied; and since gold and silver money is a 



ON COST OF PRODUCTION. 199 

commodity, like any other, we have incidentally, in 
this analysis of cost of production, taken some steps 
towards determining the value of money. Now, 
cost of production is made up of cost of labor and 
cost of capital, and the first general conclusion is, 
that if the cost of labor for any reason be enhanced, 
nothing can prevent this higher cost from taking 
effect and exhibiting itself in lower profits. The 
second conclusion is, that money-wages, or any rise 
or fall of them, provided they are uniform, or uni- 
formly rise and fall, in those departments of produc- 
tion whose commodities exchange with each other, 
have no effect at all upon value, since they are com- 
mon factors in two costs of production, and like all 
common factors, cancel each other; but any inequal- 
ity of money-wages in these departments that aflects 
the cost of labor, will have an indirect but controlling 
influence on the value of the commodities. The 
same is true of profits. So far as the rate per cent, 
is common to all branches of production, the capital 
advanced for the same period, with a similar risk of 
deterioration or loss, and so far as any one or all of 
these advance or recede uniformly and together, they 
do not affect the value of any of the commodities 
produced. But inequality in any one of these points, 
varies the relative cost of capital, and consequently, 
the cost of production, and consequently the value 
of the product. It is at this point precisely that 
there is opened up to us a clear view of the influence 
of machinery upon values. So far as machinery 
brings into play, as it always does, a gratuitous 
natural force, it is outside the pale of value ; but 
since the machinery itself is one important form of 



200 ELEMENTS OF POLITICAL ECONOMY. 

capital on which rate per cent, must be paid, the 
more machinery employed relatively to labor in the 
production of commodities, the more do profits enter 
into the cost of production, and the more powerfully 
do changes in the rate per cent., in the time of ad- 
vance, and in the risk of deterioration, tell upon the 
value of commodities so produced, as estimated in 
other commodities. 

In other words, the more, or the more durable the 
machinery in the production of a commodity, the 
larger the element of profit in the price now abso- 
lutely reduced ; on a rise of the rate per cent, there- 
fore, the value of the commodity made by more or 
more durable machinery will relatively rise. 

Having traced completely the influence of ma- 
chinery on profits, a few things must now be said on 
its influence upon wages. Formerly the prejudice 
was almost universal, and is still wide-spread in 
many parts jaf the world, that the general introduc- 
tion of labor-savi<Tg appliances does an injury to the 
laborers by taking away their work. So strongly 
has this been felt by the laborers, that in England, 
and especially in Ireland, mobs and riots have usu- 
ally accompanied the introduction of machinery into 
those departments of production in which hand-work 
had previously prevailed. If work were what labor- 
ers really wanted, the prejudice in question would 
cease to be such, and become a sound opinion ; since 
the only object and result of introducing machinery 
is to lessen work, at least with reference to a given 
product; and the laborers, to be consistent, should 
not stop with opposing new inventions, but should 
destroy all forms of existing capital, that there might 



ON COST OF PRODUCTION. 201 

be work a plenty for simple human hands. What 
the laborers really want, however, is not work, but 
wages, or rather, those commodities for which their 
wages are expended ; and the question is, whether 
labor-saving processes tend to lessen, not work, but 
work's remuneration. There is no form of proof 
that I know of, which amounts to a moral demonstra- 
tion that the substitution of machinery for labor can- 
not lessen the laborer's wages ; the opposite has per 
haps sometimes happened, and is possibly liable to 
happen, especially in agriculture, in certain transitory 
states of society. But the general appeal can be 
made to experience with all safety. As a matter of 
fact and experience, it has not been found true that 
the introduction of improved processes, the substitu- 
tion of Nature's forces for human muscle, has deteri- 
orated the condition of laborers in those departments 
Into which the inventions have been brought, or the 
condition of laborers generally. Exactly the reverse 
has usually taken place ; and wages are apt to be 
highest rather than lowest in connection with the 
most and the most durable machinery, and higher 
rather than lower, after the introduction of more and 
better machinery. Operatives in manufactories, for 
instance, are, as a rule, better paid than farm labor- 
ers ; and better paid in the first class than in the 
inferior establishments. Teamsters, in this country 
at least, and I suspect in all countries, are as well to 
do as before th« construction of railroads. So of 
spinners, weavers, and artisans of every name. In 
explanation of these general facts, it may be noticed, 
(1) that labor is always required in the construction 
and repairs of all kinds of labor-saving appliances, 



202 ELEMENTS OF POLITICAL ECONOMY. 

and so far forth, a new market for labor is opened 
up in place of any loss of market possibly resulting 
from their introduction ; (2) these forms of capital 
always tend to cheapen the products which they 
help to create, and such products because they are 
cheap find a wider circle of consumers, and more 
must be produced to supply a now broader market, 
and so far forth the demand for labor may be strong- 
er than it was before ; (3) These improvements 
cheapen also the commodities consumed by the 
laborers themselves, and therefore a given rate of 
wages now secures for them a higher grade of com- 
forts. Combining these observations with the law 
of distribution already pointed out, and the conclu- 
sion is fairly established that the effect of machinery 
is, and will be, rather favorable than otherwise to 
the laboring classes. 

Now, as a result of this entire discussion, atten- 
tion must be called to a generalization, which has 
been more or less fully noticed by several writers, 
and with the presentation of which, this branch of 
the subject will be concluded. Since, by the aid of 
the different forms of capital, and such a division of 
labor as that every part of it is made most efficient, 
the cost of production of most kinds of manufac- 
tured articles tends to decline as compared with the 
cost of production of food and raw materials, in 
whose production these advantages are less perfectly 
attainable, there is a constant tendency towards 
approximation in the value, and, if money remain 
unchanged, in the price, of raw materials and of 
finished products ; and in the degree of this approx- 
imation will be found a gauge of the success with 



ON COST OF PKODUCTION. 203 

which gratuitous natural forces and improved facili- 
ties of art have been made available in production. 
This single statement, clearly perceived in its 
grounds, grasps and holds the principal results of 
our discussions thus far. Examples of the principle 
offer themselves on every hand. Let us look at 
cotton cloth ; an example somewhat marred at the 
present moment by the consequences of the late civil 
war, and disguised by a depreciated currency ; but 
which, allowance being made for these, is an excel- 
lent illustration. At the opening of this century, 
the average price of raw cotton was just about 
twenty cents a pound ; at the middle of the century, 
and ohwards, the average price was just about ten 
cents a pound. At the first period, although accu- 
rate tables are wanting, the average price of cotton 
cloth could not have been less than sixty cents a 
yard ; at the second period, it could hardly have been 
more than ten cents a yard. The absolute price of 
raw cotton diminished in the interval in the ratio of 
2 to 1 ; while the absolute price of cotton cloth 
diminished in the interval in the ratio of 6 to 1. 
Relatively to a yard of finished cloth, the raw mate- 
rial greatly rose in value, since at the first it took 
three pounds to buy a yard, and at the last but one 
pound. There was a marked approximation all the 
while of the price of the finished product towards 
the price of the raw material ; in other words, less 
and less difference of price was due to the cost of 
manufacture, which lessening cost marks the ever- 
increasing efficiency in the production of commodi- 
ties of the gratuitous powers of Nature applied 
through machinery. According to Dr. Ure, the in- 



204 ELEMENTS OF POLITICAL ECONOMY. 

troduction of machinery into the manufacture of 
lace, lessened the cost of that product in the ratio of 
50 to 1 ; and thereby, and to that degree, approxi- 
mated the price of a pound of such lace towards the 
price of a pound of the cotton from which it was 
made. Food, raw materials, and labor, and the last 
more than the other two, tend steadily to advance in 
their power to command, that is, to buy, most kinds 
of finished products; and therefore, the millions who 
labor with their hands, and the other millions who 
own the soil and till it, have already advanced, and 
will still more advance, in a scale of comforts, with 
the advancing centuries. 



ON MONEY. 205 



CHAPTER X. 

ON MONEY. 

There is no use in saying that money is such a 
mysterious and complicated agent that nobody can 
understand it. That is the language of indolence. 
Money is wholly a matter of man's device ; it was 
invented, just as any other instrument is invented, 
to accomplish a certain purpose; and it would be 
strange if men cannot comprehend what men them- 
selves have devised. In all departments of God's 
works, indeed, we constantly meet with what can- 
not be fully comprehended nor perfectly fathomed, 
because an infinite mind has been there at work 
upon an infinite plan. But there is no such profun- 
dity in the works of men ; unfathoraableness is not 
an attribute of human skill ; and since money is an 
instrument devised by men to aid them in accom- 
plishing a certain purpose, it is as unreasonable to 
pretend that it is incomprehensible, as it would be 
to pretend that the steam-engine is incomprehen- 
sible. I hold it for certain that whatever men have 
devised, men can comprehend. 

The general purposes which money was designed 
to answer, and which it is found admirably to fulfil, 
are best perceived under the supposition that there 
were no money. Exchanges began, and were profit- 
able, long before money came into existence. Men 



206 ELEMENTS OF POLITICAL ECONOMY. 

first exchanged services directly for each other, with- 
out the intervention of any medium. This form of 
trade is called Barter. Hiram, king of Tyre, fur- 
nished to Solomon a certain quantity of cedars from 
Lebanon, and Solomon, in return, furnished the Tyr- 
ians a certain quantity of wheat and oil. This may 
serve as an instance of barter, although money had 
been in current use long previously to that transac- 
tion, as is seen in the purchase by Abraham of the 
cave and field of Machpelah, for which he weighed 
out four hundred shekels of silver, current money 
with .the merchant. It is obvious, however, that 
while barter is a great deal better than no exchanges 
at all, there are inherent difficulties in that form of 
exchange. Under pure barter, exchanges are pretty 
much limited to those parties each of whom is in 
position to render to the other such services, and in 
such quantities, as the other stands in direct and im- 
mediate need of; it is not enough, under these con- 
ditions, that a man should have a service to sell, but 
also he must find a 'man who wants that specific 
service, and more than this, a man who not only 
wants that specific service, but also has a service to 
render in return, such as the first man wants. If A 
has wheat which he wishes to exchange for a coat, 
he must find a party who wants w^heat, and who 
also is in position to render a coat in exchange for 
it, and moreover who wants just as much wheat as 
will pay for a coat, no more and no less; if he wants 
more, he may have nothing to render in exchange for 
the excess which A is willing to accept ; if less, A 
may have nothing which the other wants, besides 
wheat with which to help pay for the coat. Even in 



ON MONEY. 207 

the simpler states of society, the inconvenience, loss 
of time, and deterioration of commodities involved in 
direct barter, are very great, and in more advanced 
states of civilization would be intolerable, if it were 
possible, as it is not, for society to become advanced 
under those conditions. Exchanges are so limited 
in time, place, and variety, association is so ham- 
pered, and the development of all peculiar talents so 
impeded, under a system of simple barter, that one 
of the initial steps in the progress of all societies 
has been to hit upon some expedient to lessen 
these intrinsic difficulties ; and so to facilitate ex- 
changes. This expedient has been the invention 
of money, that is to say, the selection of some prod- 
uct, which, by general consent, instead of the par- 
ticular purchasing-power of common commodities, 
should have a universal purchasing-power ; so that, 
whenever anybody has anything to exchange, he 
may first exchange it for this product, whatever it 
be, and then with this product purchase at any time 
and place, whatever he may want. Money makes 
no alteration in any law of value, but merely sub- 
stitutes for convenience' sake in every transaction 
in which it plays a part, a universal for a specific 
purchasing-power; a book, for example, has a specific 
purchasing-power; there is somebody who wants it, 
and is willing to give a sum of money for it; and 
the owner by the sale of it parts with a product 
which has only the power to purchase something 
from a few persons, and receives a product which 
has the power to purchase something from all per- 
sons ; it is not true to say that the book is worth 
more than the money, or the money is worth more 



208 ELEMENTS OF POLITICAL ECONOMY. 

than the book, because they are just worth eacn 
other, as is demonstrated by the sale ; but it is true 
to say that the seller of the book has substituted in 
the place of a limited purchasing-power, of which 
he was proprietor, a general purchasing-power, of 
which he has now become proprietor; and that the 
command of the money, which has no more value 
than the book had, does carry along with it a supe- 
rior command over purchasable articles generally. 
In one word, value in the form of money is in a 
more available shape for general purchasing, than 
value in any other form. This is the exact expression 
for what truth there is in the common vague remark, 
that money is different from all other commodities ; 
in point of value, it is different from other commodi- 
ties in just one respect, namely, while they have the 
power of buying some sorts of things from some per- 
sons, it has the power, derived from the usages of 
society, to buy all sorts of things from all persons. 

It might seem, at first sight, as if the introduction 
of money, instead of simplifying the operations of 
exchange, would only complicate them, since it 
necessitates two exchanges, where otherwise there 
would be but one ; but reflection, as well as experi- 
ence, is able to convince us that there is no machine 
which economizes labor like money ; no instrument 
which plays so important a part in production ; no 
invention, unless it be the invention of letters, which 
has contributed more to the civilization of mankind. 
While men still exchanged in kind, and knew no 
other mode, the purch-asing-power of a service was 
very much confined in place, and would not be 
parted with except in view of the return service 



ON MONEY. 209 

actually there present, the ultimate parties to an 
exchange must for the most part come together 
locally, in order to effect an exchange ; under a 
money system, this is no longer necessary, for it is 
sufficient to constitute a market for any commodity 
that it is wanted anywhere on the globe, the middle 
man, paying the seller for it in money, transports it 
thither, and receives back his money with a profit 
from the ultimate consumer. Thus money brings 
conveniently buyers and sellers together commer- 
cially, no matter how far separated locally. So, 
also, money generalizes any purchasing-power in 
point of time. The fruit-dealer, for example, must 
dispose of his product quickly, or it perishes on his 
hands, but by transmuting his perishable product 
into money, he may keep its power of purchase 
locked in this form as long as he lists ; the money, 
indeed, is only good to purchase with, but it puts an 
interval at the pleasure of the holder between sell- 
ing and buying, and with this generalized power in 
his pocket he may buy when he will, and what he 
will, and where he will. Money, too, makes any 
purchasing-power portable, divisible, and loanable. 
A man may carry the value of his farm in his purse, 
and may divide it up for a thousand different pur- 
chases, and especially is able to loan it in this form, 
to receive it back again with interest at a future day. 
Value in any other form than money is not gener- 
ally suitable for loaning, because there are com- 
paratively few who are willing to borrow a merely 
specific purchasing-power, and guarantee its return 
in that form with the due increase ; but money, as a 

generalized agent, will command all services at all 

u 



210 ELEMENTS OF POLITICAL ECONOMY. 

times, will serve at any man's bidding, and work in 
all sorts of harness, and therefore it is rarely difficult 
for men to loan any sums of money they have not 
immediate use for, and to make every moment of 
their own abstinence pay tribute in interest, and the 
advantages to both lenders and borrowers secured 
through this form of value — money — are incalcu- 
lable. Thus we see the reason why governments, 
corporations, and individuals, when they borrow, 
borrow money. This general view of the uses and 
advantages of money will show it to be one of the 
most potent of the social agents, and will serve also 
to introduce our first specific proposition. 

1. Money is a medium of exchange. 

The word medium in this proposition, is to be 
taken in its etymological and strict sense, as some- 
thing that comes between two extremes, and serves 
also to relate them to each other. Money is ex- 
changed for other things, as a means, and not as an 
end ; it is a very great help in exchanging all other 
things, but is never exchanged for itself in an ulti- 
mate transaction. Small boys, indeed, swap cents, 
but men, the miser excepted, who is under a deplor- 
able fallacy of the senses, use and estimate money 
first as the medium which facilitates the real ex- 
changes of society. What is really exchanged is 
the wheat, the cloth, the lumber, the furniture, the 
service of eveiy kind, and money is but the instru- 
ment making those exchanges easy, which might 
perhaps go on without it, though with difficulty and 
loi^is. It is somewhat like a railroad ticket. Trans- 
portation to a given place is what is really bought 
when one buys a railroad ticket. The evidence of 



ON MONEY. 211 

the purchase is the bit of paper. It comes in as a 
medium between the traveller and the railroad com- 
pany, and while it facilitates the real exchange, it 
also partly disguises it. The resemblance holds in 
the main feature, but in two respects the likeness 
fails ; money is not a specific ticket for one purpose, 
but is a general ticket for all purposes of purchase ; 
and secondly, metallic money stands as a value in its 
own right, at the same time it is serving as a me- 
dium, while the ticket does not. Still, we are all 
desirous to get money, not for the sake of the money, 
but for the sake of those things which the money will 
buy. We part with it freely and constantly for those 
things which we care more about. What we really 
care for is what the money will buy, is the command 
over all services and commodities which the posses- 
sion of money insures. If we could give our own 
service or commodity, whatever it is, and receive 
directly in return the service or commodity which 
we want, whatever it is, there would be no need of 
money. This is generally inconvenient, and some- 
times impossible. Therefore we introduce a middle 
term between the two extreme terras. Money is 
a good mean which helps exchange the two ex- 
tremes. And the value of the money of any coun- 
try is a very small fraction, probably not over one 
fortieth, of the value of that which it helps to ex- 
change. By the last census the estimated value of 
real and personal property in the United States was, 
in round numbers, $16,000,000,000. The whole 
currency of the country in 1860 was certainly less 
than $400,000,000; so that the money of the countr;j 
stood to its aggregate material wealth in the ratio 



212 ELEMENTS OF POLITICAL ECONOMY. 

at least of one to forty. Besides all that portion 
of this real and personal property which changed 
hands in that year, the currency helped to exchange 
all the simple services, as those of professional men, 
teachers, servants, and so on, which were rendered 
in that year, and which are not included in the cen- 
sus estimate, except partially and indirectly, so far 
as the returns to such services had been transformed 
into real and personal property. If we suppose that 
transactions to the value of $16,000,000,000, were 
concluded in this country in the year 1860, and 
that ^400,000,000 constituted the money in circula- 
tion, then it follows that each dollar of money cir- 
culated on the average forty dollars of value, or, 
what is the same thing, each dollar of the circula- 
tion made on the average forty p-ayments, in the 
course of the year. It is, of course, impossible to 
determine with exactness the aggregate value of 
the money exchanges of any country for any given 
period, but if this could be determined, and should 
then be regarded as a dividend, for which the aggre- 
gate money of the country were a divisor, the quo- 
tient would express what has been called the rapidity 
of circulation, that is, the number of times, which 
each dollar changes hands on the average in order to 
effect the given amount of exchanges ; and it would 
also express how many more times the value of that 
is which the money of a country helps to exchange, 
than its own value is. That it should express this 
last, however, accurately, we must suppose that the 
same product is exchanged by the help of money 
only once between the producer and the consumer. 
Probably the ratio of one to forty is below rather 



ON MONEY. ' 213 

than above the true ratio of the aggregate money of 
the commercial nations to the money value of those 
products, reckoned only once, which this money 
helps to exchange. Therefore we see that the hub 
and spokes, and rim of the wheel of exchange con- 
sist of services and commodities of every descrip- 
tion; while, to borrow the famous comparison of 
Hume, money is but the grease which makes the 
wheel turn easier. It is a vast mistake to suppose 
that the grease is the wheel itself. 

Hume's comparison, though exact as far as it goes, 
and for the purposes for which he used it, is never- 
theless capable of misleading the mind. It is true 
that money is the grease which facilitates the revo- 
lution of the wheel of exchange, but it is also true 
that the dimensions of the wheel itself are vastly 
gi'eater than they would have been had it not been 
for money. Money indeed helped exchange the prod- 
ucts that already existed at its first invention, but 
by far the largest part of products since have come 
into existence largely through the agency of money. 
We get quite too low a view of the function of 
this potent agent, if we think of it merely as an 
aid in circulating products that would have existed 
whether or no ; some products would have existed 
whether or no, and money certainly is of great use 
and convenience in helping bring these to the ulti- 
mate consumers ; but this is a partial and wholly 
inadequate view of the true function of money as a 
medium of exchange. The fact that such a medium 
is in universal circulation, and that the holders of 
it are ready to exchange it against any sort of ser- 
vices adapted to gratify their desires, exercises a 



214 ELEMENTS OF POLITICAL ECONOMY. 

kind of creative power, and brings a thousand prod- 
ucts to the market which would otherwise never 
have come into existence. Since money will buy 
anything, men are on the alert to bring forward 
something which will buy money ; and since money 
is divisible into small pieces, an incredible number and 
variety of small services are brought forward to be 
exchanged against these pieces, which services we 
have no reason to suppose would ever be brought 
forward at all, were it not for the strong attraction 
of the money. In this point of view, the true 
nature of money is best perceived, when it is con- 
sidered, as it really is, as a very important portion 
of the capital of the world. Capital, as we have 
already learned, is any product reserved to be em- 
ployed in further production. The circulating me- 
dium of any country is the most active, the most 
profitable, and the most essential of all those instru- 
ments reserved in aid of further production. The 
axe, the plough, the spindle, the loom, the wheel, the 
engine, are all instruments, are all capital, and they 
each aid respectively some part or parts of the pro- 
cesses of production ; but money is a form of capital 
which stimulates and facilitates all the processes of 
production without exception. Just as we have seen 
that money is a form of value generalized, so is it also 
a generalized form of capital, that is to say, it is an 
instrument capable of aiding all production in every 
department, while every other instrument is capable 
of aiding but few processes in one department. 
Without money, there could be no thorough division 
of labor, because there would be no adequate means 
of estimating or rewarding each one's share in a com- 



ON MONEY. 215 

plicated process. By means of money, all services, 
small or great, contributing toward a common prod- 
uct, are neatly measured and paid for by some 
one, who thereby becomes proprietor of the whole 
product; or, if the contributors chose, they may wait 
till the product itself is sold, and then the money 
received is divisible without loss to each contributor, 
according to the service rendered. Thus the influ- 
ence of money, as capital, pervades the whole field 
of exchange, from centre to circumference, facilitat- 
ing every transfer, and stimulating to new transfers. 

Money, then, is a medium of exchange ; and the 
question arises in this connection, how much of it is 
wanted ? Clearly, only so much as will serve the 
purposes which such a medium is fitted to subserve ; 
there should be enough fairly to mediate between 
the services actually ready to be exchanged then 
and there, and also enough fairly to call out other 
services, proper and profitable in the then circum- 
stances of society, and whose only obstacle to a 
profitable exchange then and there, is the lack of a 
facilitating medium. All increase of money beyond 
this point, which the very nature of money itself 
marks out as the boundary, leads to a diminution 
in value of every part of it, to a consequent dis- 
turbance of all existing money contracts, to a uni- 
versal rise of prices which are illusory and gainless, 
to unsteadiness and derangement in all legitimate 
business, and to a spirit of restless enterprise and 
speculation, which seeks to draw off" the excess of 
money in untried and reckless experiments. These 
consequences from this cause have been again and 
again witnessed in every commercial country, and in 



216 ELEMENTS OF POLITICAL ECONOMY. 

the United States on a gigantic scale during the 
seven years past. I cannot help thinking that Mr. 
Carey, who has thrown so much light on certain 
portions of the field of Political Economy, is de- 
cidedly in the wrong in the view he maintains that 
there cannot be too much money in any country. 
No writer has brought out more clearly than he has, 
the intimate relations of money with all industrial 
development ; but he seems at times to forget that 
money, essential and potent as it is, is essential 
and potent only as a medium. The real subjects of 
exchange are mutual efforts, mutual services, and 
money is the instrument merely that comes in be- 
tween the real services exchanged to facilitate the 
exchange ; and therefore it seems to me to be per- 
fectly conclusive on the point to remark, that the 
quantity of money needed in any country, or in the 
whole world, is limited by the number of the ser- 
vices ready to be exchanged, to facilitate the ex- 
change of which is the good purpose and end of 
money. The physical and mental powers of men, 
which alone give birth to services, when considered, 
as they must be in this connection, as belonging to 
a given number of men at a given time and place, 
are strictly limited: and although the presence of 
money then and there is both a stimulus and an aid 
to their bringing forward services of all sorts to the 
market, there are obvious limitations both in their 
powers and in their circumstances; and the quan- 
tity of money needed among them is just that 
quantity which will fairly act as a medium in ex- 
changing the services which they are able and 
willing to render to each other. All increase in 



ON MONEY. 217 

the quantity of money beyond that point would 
have, and could have, the only effect of increasing 
the nominal prices of services, without making the 
services themselves any greater in number or better 
in quality. It is with money exactly as it is with 
any other form of capital, allowance being made for 
the fact that money is a kind of generalized capital. 
How many ships does a commercial nation need to 
employ ? As many as will fairly take off its exports 
and bring in its imports. Ships are wanted for one 
definite purpose ; and when enough are secured to 
answer that purpose, all additions to the number will 
lessen the value, that is, the purchasing-power of 
ships generally. So of all instruments whatever. 
Enough is as good as a feast. Enough is better 
than more. In regard to every form of capital, the 
point of sufficiency is determined by the quantity of 
work to be done. Now, money is a form of capital, 
an instrument, having this peculiarity only, that it is 
capable of aiding to a certain extent all branches of 
production ; and the point of sufficiency in the quan- 
tity of money for a country, or for the world, is de- 
termined by the amount of products of all kinds, 
otherwise ready to be exchanged, and only waiting 
the facilitating agency of an exchange medium. 
The quantity of money being given, an increased 
aggregate of exchanges can. be facilitated by it, by 
means of a greater rapidity of circulation of that 
given quantity. |400,00€,000, changing hands forty 
times, will effect exchanges to an aggregate of 
$16,000,000,000 in a year; the same sum, by a 
circulation doubly rapid, will effect twice that ag- 
gregate of exchanges; so that, it follows, that an 



218 ELEMENTS OF POLITICAL ECONOMY. 

increased amount of business to be done, does not 
necessarily require ian increased volume of money, 
but sometimes only a brisker use of that already in 
circulation. As in mechanics, so in money, the 
whole power is the product of the two factors, 
mass and velocity." Money is like any other tool, 
the more constant its use the more profitable its 
agency. If $16,000,000,000 of value are to be ex- 
changed, it is very much cheaper that $400,000,000 
of money should do the work, changing hands forty 
times, than that $800,000,000 should be employed, 
changing hantls only twenty times. The quick 
movement of a small mass is better than the tor- 
pid movement of a big mass, both in what it saves 
of expense, and in what it presupposes of the gen- 
eral conditions of exchange. It only remains under 
this proposition to add, what will be more clearly 
perceived when we come to treat of foreign trade, 
that no enterprising commercial nation, so long as 
the natural right of exchange is left unimpeded, and 
so long as the money of the nations consists of gold 
and silver, or paper, the genuine representative of 
these, can ever lack, for any great length of time, a 
sufficient quantity of money to serve as its medium 
of exchange. 

2. Money is a measure of value. 

I hope it was made very plain, under the preced- 
ing proposition, what is meant when it is said that 
money is a medium of exchange. Closely com- 
mingled with its function as a medium, money has 
another very delicate function, as a measure of value. 
How important this second function is may be seen 
by supposing for a momeilt that there were no in- 



O* MONEY. 219 

strument in existence capable of performing it. 
Without a, common measure of values of different 
sorts, it would be inconvenient, not to say impos- 
sible, to carry on traffic at all. For instance : A 
baker has only loaves of bread, and wishes to buy a 
hat, a horse, a house. How many loaves shall he 
give for each ? Without some common denomina- 
tion in which these differing values can be expressed, 
and by means of which they can be brought into 
numerical relations with each other, it would be an 
awkward piece of business to effect even the three 
exchanges ; and every time he wished to purchase 
another article, there must be an independent cal- 
culation from different data, to decide the terms of 
the exchange. Introduce now some common denomi- 
nations in which each of these values can express 
itself, and the difficulty disappears in an instant. 
" My loaves are worth ten cents each," says the baker. 
" My hat is worth ten dollars," says the hatter. The 
terms of exchange, then, are 100 for 1, and no par- 
leying. So of the rest ; so of everything that is ever 
bought or sold. Dollars and cents are the denomi- 
nations in which values are reckoned, and by which 
they can be compared with each other numerically, 
just as feet and inches are the denominations by 
which different lengths are compared, and pints and 
quarts the denominations by which capacity is meas- 
ured ; and the builder and the surveyor would not 
be more at a loss in their work without the units of 
length, or the vintner without the units of capacity, 
than everybody would be at a loss without the units 
of value. Dollars and cents are, as it were, the 
language in which values express themselves ; and, 



220 ELEMENTS OF POLITICAL ECON-OMT. 

without some such language, the busiest marts of 
exchange would soon become not only a silent but a 
deserted scene. 

The difference between money as a medium and 
money as a measure is one that should be clearly 
delineated and perfectly apprehended, because there 
is no such thing as adequately understanding the 
subject of money unless the two functions be kept 
distinct in the mind, as well in their single as in their 
commingled action. The original measure of value 
in France, England, and Scotland, was the pound 
weight of silver. No coin of that weight was ever 
struck; but a pound of silver was cut into 240 coins 
called pence. Twelve of these pence were called a 
solidus, or shilling. Thus as applied to silver, the 
symbols lb. and & denoted equivalent weights, the 
former of uncoined metal, the latter of metal coined. 
But in course of time, more than 240 pence so called, 
and at last in Elizabeth's reign, 744 pence, came to 
be coined out of a lb. of silver. Yet all the while, 
240 of these pence were called a £. <£ and lb., both 
a contraction of the Latin libra, were no longer 
equivalent. The lb. of weight continued stable : the 
& of money had dwindled to less than one third. 
Yet the name pound continued to attach to 240 
pence, although the pence embodied a less and less 
quantity of silver. As the medium contained a less 
quantity of silver, so the measure^ that is to say, the 
denomination., represented a less quantity of silver. 
This example will help us understand the difference 
between money as a medium and money as a meas- 
ure. Dollars and cents perform their duties as a 
medium by virtue of their being corhmodities; they 



ON MONEY. 221 

perform their duties as a measure by virtue of 
their being denominations. Yet the denominations, 
'though spelled and sounded as before, vary with 
every change that takes place in the medium. 

There are two kinds of changes to which a metal- 
lic money is liable, considered as a medium of ex- 
change. First, a less quantity than before of a 
precious metal may go to a certain coin. In 1834, 
the gold eagle of the United States was reduced in 
weight from 270 to 258 grains, and the alloy in- 
creased to one part in ten from one part in twelve. 
This was taking out more than six parts of gold out 
of every J.00 parts, in ^U the gold coins of the coun- 
try. Yet the coins bore the same names as before. 
As a medium, other things remaining equal, their 
purchasing-power was diminished more than six per 
centum ; and consequently, as a measure of other 
values, the denominations of these coins varied sim- 
ultaneously and equally with the coins themselves 
Secondly, coins are liable to change in their function 
as a medium from changes in the general purchas- 
ing-power of the metals themselves. If for any 
reason an ounce of gold will buy less of other things 
than formerly, the coins cut from that gold will buy 
less than formerly, and this change in the medium 
will be followed by a corresponding change in the 
measure. Other tables of denominations have a 
basis independent of the things which they measure, 
and are not variable by the quality or quantity of 
those measurable things. A French metre, for ex- 
ample, is an invariable unit of length the world 
over ; so is one of Troughton's inches ; but this is 
not true of the denominations of money at all. 



222 ELEMENTS OF POLITICAL ECONOMY. 

Pounds, dollars, guilders, francs, and their subdivis- 
iont^, are denominations of value, which is a vari- 
able relation, and as denominations they follow the 
fortunes of the coins whose names they are. When 
the current dollar, for instance, sinks to one half, or 
rises to twice its previous purchasing-power, we call 
it a dollar all the while, the denomination perpet- 
ually shifting with every variation of the thing. The 
same name attaches to a shifting denomination. 
The denominations of value, then, are not an inde- 
pendent standard to which values themselves can be 
referred, as lengths are referred to the metre, but 
vary with the varying purchasing-power of the coins, 
so that money as a measure is only uniform when 
money as a- medium is uniform. So indispensable, 
however, in all exchanges is some common measure 
of value, that the denominations of money, notwith- 
standing their variable character, are universally em- 
ployed in estimating and exchanging commodities, 
even when no money as a medium is used. 

Without reflection, it might be supposed, that, 
since the measure rises and falls with the medium, 
no practical error is liable to follow the confounding 
of the two functions ; but it is the very sympathetic 
connection between the two that gives rise to the 
possibility of error. If the units of money were, 
like the linear units, inflexible, so that all variations 
of the medium could be instantly detected by a ref- 
erence to the standard of measure, there would be 
no difficulty at all : I could loan a thousand dollars 
for one year, or ten years, and, however much the 
medium might vary in the interval, be sure that I 
should receive back just as much purchasing-power 
as I loaned, with the interest on the same ; it might 



OIT MONEY. 223 

be more or fewer pieces than the number I loaned, 
which is a matter of indifference. As it is, no lender 
can have any such assurance. The borrower is 
bound to pay back with interest the same number 
of dollars as he received, although the dollar-medium, 
and hence the dollar-measure, may meanwhile have 
fallen or risen greatly. In the United States, for the 
past six years, the current money has exchanged 
asfainst i^-old from 130 to 285 of the one for 100 of 
the other ; and it is very obvious that all debts of old 
standing, paid in this period, have been only legally, 
and not actually, liquidated ; and that debts con- 
tracted when the depreciation was more and paid 
when it was less were more than actually liquidated. 
This, of course, presupposes, what we are not yet in 
a position to assume, that gold remained a proper 
and uniform standard. The subtle error to be 
avoided alike in discussion and in practice is, to 
suppose that money, either as a medium or as a 
measure, remains unchanged, simply because the 
name remains unchanged by which we designate 
its denominations. 

It may be asked, why cannot this source of error 
be obviated? I reply, that the error may be obvi- 
ated, but the source of it cannot be obviated from 
the nature of the case. It was shown in our chap- 
ter on Value that to find an invariable measure of 
value is a natural impossibility. Money, as it is the 
medium of exchange, is also the best attainable 
measure of value, and is used throughout the civil- 
ized world to compare with each other all values 
except its own ; but since value in general, and the 
value of money as well, is a thing of relation, and 



224 ELEMENTS OF POLITICAL ECONOMY. 

varies with every change affecting either of the 
things exchanged, as much by changes affecting the 
things it exchanges for as by changes affecting 
itself, — the value of a hat, for instance, as estimated 
in gloves, increasing by any cheapened process in 
glove-making, though no change at all take place in 
the cost of hat-making, — a perfect measure of value 
is impossible. Therefore the denominations of 
money, which is the best attainable measure, can 
never have a meaning absolutely fixed, but slide up 
and down the scale along which the purchasing- 
power of money as a medium is moving, and they 
are consequently useless as a standard to detect any 
changes in the medium itself, while, the medium 
remaining uniform, they instantly detect the changes 
in all other purchasing-powers. This will always be 
so. The same difficulty does not occur in having a 
perfect measure of length or of capacity, — a perfect- 
inch or a perfect pint. The French have a perfect 
system of measures and weights. Their mathemati- 
cians measured an arc of the earth's circumference, 
and thus determined the absolute length of a degree 
of latitude. Three hundred and sixty times this 
length makes up the length of the earth's circumfer- 
ence, — an invariable measure recoverable again even 
if it should be once lost. This measure divided by 
40,000,000 gave the French nation their metre^ which 
is a perfect unit for the measure of length. A tenth 
part of the metre cubed gave them their litre, which 
is a perfect unit for the measure of capacity. The 
weight of a hundredth part of a metre cubed of dis- 
tilled water at the temperature of maximum density 
is the gramme, an invariable unit of weight. A 



ON MONEY. 225 

linear length often metres squared gives the are, the 
unit of surface. A perfect measure of anything de- 
mands for its starting-point something absolute and 
invariable: in value there is nothing absolute; we 
begin with a relation, and therefore an unchangeable 
measure is not to be looked for. Still, it is vastly- 
important for the interest of exchange that the 
accepted measure of value be as little liable to fluc- 
tuations as possible, especially in all cases in which 
lapse of time is involved before the exchange is fully 
consummated. For precisely the same reason that 
the bushel-measure should be of the same capacity 
in sowing-time and in harvest, to sell by and buy by, 
always a bushel, no more and no less ; and the yard- 
stick an inflexible measure of length, the same for 
buyer and seller, always thirty-six of Troughton's 
inches, no more and no less ; so, as far as it is pos- 
sible in the nature of things, ought the medium and 
hence the measure of values to represent year in and 
year out a uniform degree of purchasing-power. If 
money had but one function, namely, to serve -as a 
present means of exchange ; if there were no credit, 
contracts, annuities, involving the element of time; 
if the character of the medium did not also deter- 
mine the signification of the measure; then the sub- 
ject of money would be easily understood, and the 
substance that should serve as money would be a 
matter of comparative indifference. As it is, the 
second and more delicate function of money both 
complicates the theme, and excludes from the cate- 
gory of good money all but one or two of the sub- 
stances that have ever been used as money. We 
have just now seen the radical reasons why no 

15 



226 ELEMENTS OF POLITICAL ECONOMY. 

money can even tolerably perform its function as a 
measure that is not tolerably uniform in its value as 
a medium. This consideration brings us naturally 
to our third specific proposition. 

3. Gold and silver constitute the best money. 

The purposes of money have been served in dif- 
ferent countries and in different ages by a variety of 
products, according to the taste and circumstances of 
the people. Cattle have been employed as money 
among pastoral people in almost all periods of the 
world, and are still employed for this purpose in 
Africa. Slaves among the Anglo-Saxons; wampum 
among 'the American Indians; salt in Abyssinia; 
codfish in Newfoundland; tobacco in Virginia; 
wheat in Massachusetts; nails in Scotland; stamped 
leather among the Carthaginians, and others ; bark 
stamped with the image of the sovereign in China ; 
platina in Russia; copper, simple or compounded 
with other metals, among the ancient Romans, and 
most other nations ; iron among the Spartans ; gold 
and silver among all civilized nations sooner or 
later ; have been or still are used as money. Of all 
these products, the two last have shown themselves 
to be best adapted for the purposes of money, and 
have come consequently into universal use in the 
commercial world. Experience has not only demon- 
strated the superiority of these metals over all other 
forms of money, as is shown by the fact of their 
universal adoption, but reason also is able to tell us 
why gold and silver are the best money. 

(1.) On account of their comparatively . steady 
value. This is the main reason, and it must be 



ON MONEY. 227 

firmly grasped. There is no end to the confusion 
which has crept over discussions on money from the 
circumstance that the writers have not first of all 
'determined for themselves with fixed clearness what 
value is. This must be done at the outset, if there 
is to be the least hope of sound results. Some writ- 
ers speak of money as destitute of intrinsic value, 
because we cannot eat it, drink it, wear it, or make 
any other direct use of it. Mr. Macleod, the emi- 
nent English economist, to whom I sha]l acknowl- 
edge my obligations in the chapter on Credit, regards 
money as required only to measure, record, and 
transfer debts. Money is, according to him, a repre- 
sentative of debt. Now, I cannot agree with either 
of these representations. Value is value, and there 
is only one kind of it, and the epithet intrinsic is 
only used to help out a lame theory, and no such 
epithet is pertinent to the word value, and no one. 
can show anything different in the value of money., 
either in respect to the way in which it arises, or 
in the laws which control it, from the value of 
any other commodity, excepting only the difference 
already pointed out, that money by the usages of 
society has a generalized instead of a specific pur- 
chasing-power. It is all false to speak of gold and 
silver money as the representative of value. It 
represents nothing but itself. It will buy other 
things certainly, and so will a bushel of wheat. 
Value is simple purchasing-power, and money has 
value because we can purchase with it, exactly as 
everything else has value for that very reason. 
Society is so constituted that a want is felt in it of 
some medium of purchase ; this want cannot be 



228 ELEMENTS OF POLITICAL ECONOMY. 

supplied without an effort ; whoever makes the effort 
will demand a corresponding effort made for him ; 
when it comes to the exchange of the medium for 
the wheat, for example, there stand face to face, as 
in every other instance of exchange, two desires and 
two efforts ; there is then, as always, a reciprocal 
estimation of the two services about to be ex- 
changed, and the estimation agreed on is the value 
of the medium expressed in wheat. If the want of 
any medium of exchange is less felt in any commu- 
nity, or if the effort required to secure it be for any 
reason less, other things remaining the same, the 
value of the money will be less, that is to say, it 
will purchase less of other things. If the demand 
for money as an instrument of purchase be greater, 
or the obstacles in the way of its supply be increased, 
other things as before, the value of the money will 
be more. It is the old circuit over again of wants, 
efforts, estimations, satisfactions. The value of 
money arises under the same conditions as every 
other value, and is variable by any change in any 
one of the four elements which alone can vary the 
value of anything. Two desires and two efforts 
invariably precede every exchange. A change in 
any one of these, the rest unchanged, can vary value, 
and nothing else can vary it; and, as it seems to me, 
no person has ever shown or can show that the value 
of money is in any respect, save the superficial one 
already noticed, exceptional and peculiar. And it 
also seems to me that nothing more is needed in 
order to remove the last vestiges of the dark cloud 
which has so long overhung this subject, than to 
familiarize one's self first of all with the true doctrine 



ON MONEY. 229 

of value in general, and then hold fast the truth, ex- 
emplified on every side, that the value of money is 
just like any other value. 

Gold and silver, then, as money, have value in the 
same sense and for the same reason as any other 
productive instrument, and we must now attend to 
the reasons why their value is so steady. 

(a.) On account of the comparatively steady de- 
mand for these metals. Gold and silver are wanted 
for two general purposes: first, to be used as money, 
and second, to be used in the arts ; and it has been 
estimated that about two fifths of the aggregate 
quantity in the world is in the form of money, and 
the other three fifths in the form of plate, utensils, and 
ornaments. Now, so far as the element of desire 
controls value, the purpose for which any article is 
desired is a matter of indifference. The aggregate 
desire fof it for all purposes, accompanied with the 
offer of something with which to buy it, constitutes 
the demand ; and the more universal the desire, no 
matter for what purpose, the steadier the demand, 
and, so far forth, the steadier the value. It is worth 
noticing, as a point still too little noticed, that it 
is not the demand for the precious metals as coin 
alone that determines their general value, nor the 
demand for them in the arts, but the combined de- 
mand for all purposes; just as the value of barley is 
regulated, partly by the demand for it for food, and 
partly by the demand for it for malting purposes. 
Hence an ounce of bullion of the standard fineness, 
destined for the smelting-pot of the artisan, is worth 
within a very trifle as much as an ounce of coined 
money. By the law of the Bank of England an 



230 ELEMENTS OF POLITICAL ECONOMY. 

ounce of standard gold is coined into £S 17s. iO\d.^ 
and the Bank is obliged to buy all bullion and for- 
eign coins of the standard fineness offered to it at 
.£3 175. 9^. per ounce — a difference of three half- 
pennies. Now, gold and silver are so indispensable 
in the form of money, so beautiful in the form of 
ornaments, so well adapted to serve the purposes of 
luxury and love of distinction, so really useful in the 
arts, that the demand for them is constant and well- 
nigh universal; and if, in the progress of civilization, 
a less quantity should be desired for personal orna- 
mentation and purposes of luxury, a greater will 
doubtless be required for the other uses; and so, as 
the demand in the past has been steady, and perhaps 
steadily increasing, there is every reason to expect 
the same for the time to come. And it contributes 
to the steadiness in value of the gold and silver coin, 
that there is at hand in the form of plate a reservoir 
from which a chance chasm in the coin may be 
replenished, or an extra demand for it answered. 

(b.) On account of their tolerably uniform cost of 
production. Not desires alone, but efforts as well, 
regulate value. Supply is the correlative of demand; 
and when to a steady demand there answers a steady 
supply, realized under conditions of pretty uniform 
difficulty, there will be of course a pretty steady 
value. Nature herself has indicated, in a manner not 
to be mistaken, her intention that these metals 
should be the money of the nations. She has 
scattered them all over the earth, and so scattered 
them that the cost of their production has been won- 
derfully uniform ever since civilization and commerce 
began. There have been but two marked changes 



ON MONEY. 231 

in the value of gold and silver throughout the com- 
mercial world in the last thousand years; the first, 
in the sixteenth century, in consequence of the occu- 
pation of Mexico and South America by Europeans, 
when the value of the precious metals diminished, 
silver a good deal, it is difficult to say how much, 
and gold considerably less ; the second, in conse- 
quence of the'discovery of the gold-fields of Califor- 
nia and Australia in the present century, which, it is 
thought by most, has still further diminished the 
value of gold. With these exceptions, and similar 
ones are not likely to recur, these metals have 
always maintained and are likely to maintain a 
remarkable uniformity of value, on account of a 
remarkably uniform cost of production. Even these 
changes became only gradually perceptible, and did 
but little injury to individuals, scarcely disturbing 
the justice of exchange or the measure of value, 
except in cases of long annuities and similar obliga- 
tions. A universal rise of prices soon adjusted ex- 
changes to the new state of things. 

(c.) On account of their quantity. The amount 
of gold and silver in circulation in the commercial 
world, to say nothing of the quantity so easily 
brought into circulation from the reservoir of plate, 
is so vast, that it receives the annual contributions 
from the mines much as the ocean receives the 
waters of the rivers, without sensible increase of its 
volume, and parts with the annual loss by detrition 
and shipwreck, as the sea yields its waters to evapo- 
ration, without sensible diminution of volume. The 
yearly supply and the yearly waste are small in com- 
parison with the accumulations of ages; and therefore 



232 ELEMENTS OF POLITICAL ECONOMY. 

tbe relation of the whole mass to the uses of the 
world, and the purchasing-power of any given por- 
tion, remain comparatively steady. It is probable 
that production at the mines might cease altogether 
for a considerable interval without very sensibly en- 
hancing throughout the commercial world the value 
of gold ; as it is certain, from experience, that a 
production very largely augmented only gradually, 
and after a considerable interval, diminishes its value. 
The mass of the precious metals has been aptly com- 
pared to the heavy balance-wheel in mechanics, 
which preserves an equable and working condition 
of the machinery under any sudden increase of the 
power, and even when the power is for a moment 
withdrawn. At this point a caution is needful. Be- 
cause it is affirmed that the great amount of the 
precious metals is a ground of their firm value, it 
must not be supposed that we are going beyond our 
general doctrine, and introducing another element, 
namely, quantity, besides the four elements which, 
as we have so often alleged, can alone vary the 
value of any service ; quantity, in itself, is not an 
element capable of varying the value of anything, 
but taken in connection with durability, it is an 
element of what might, perhaps, with propriety* be 
called the inertia of value, and tends to keep the 
purchasing-power of gold and silver where it is. 
Value and steadiness of value are two distinct 
ideas. The present value of an ounce of gold ex- 
pressed in any other commodity is decided by four 
things alone ; but other elements besides these may 
help determine that that ounce of gold shall have 
ten years from now a purchasing-power approxi- 



ON MONET. 233 

rnately the same as now. It will depend, of course, 
in the last analysis, upon the relation of the then de- 
mand to the then supply ; yet the vast quantity of 
the precious metals in existence, combined with 
their durability, prevent those fluctuations in the 
supply which are so destructive to a steady value. 
It is not as with the fruits and the grains, whose 
value varies perpetually with the seasons, and which 
are so perishable that they must be sold soon or 
never : gold and silver are almost indestructible, and 
except by wear and accident, the existing mass is 
not liable to be lessened, and in so far as the annual 
production from the mines exceeds the yearly waste 
there is a natural provision made for the natural in- 
crease of derriand, to supply the wants of the world 
for currency and for the arts, without much disturb- 
ing the relation of the demand and supply. The 
quantity, in connection with the durability of the 
precious metals, helps preserve to them a tolerably 
steady value from generation to generation. 

(d.) On account of their fluency. Gold and sil- 
ver are in demand the world over. Having great 
value in comparatively small bulk, they are easily 
transported from continent to continent ; and when- 
ever, from any cause, they become relatively in 
excess in any country, and thus lose there a por- 
tion of their previous purchasing-power, there is an 
immediate motive to export them to other countries 
where their power in exchange is greater, and thus 
the equilibrium is restored. The value of gold and 
silver throughout the commercial world is thus kept 
pretty steady by the facility with which they are 
carried from points where they are relatively in ex- 



234 ELEMENTS OF POLITICAL ECONOMY. 

cess to points where they are relatively in deficiency. 
There is a gain in carrying them to those countries 
where their power of purchase is the greatest, be- 
cause more commodities can be obtained for them 
than at home ; and private motives here coincide 
with public welfare, since what the traders do in 
transporting gold and silver, with an eye to their 
own interest, helps maintain at home and abroad 
the steady value of these commodities. This law of 
the distribution of the precious metals by commerce, 
and the equilibrium of value resulting therefrom, is 
as natural and beautiful as the law which preserves 
the level of the ocean, or that which balances the 
bodies of the planetary system. This has come at 
length to be recognized by the nations, and the laws 
which used to forbid by heavy penalties the expor- 
tation of gold and silver are all swept away, and 
these metals are now free to go, and do actually go, 
where they can obtain the most in exchange. It is 
absurd to suppose that their owners would carry 
them out of a country, unless they were worth more 
abroad than at home, and therefore the prejudice 
which exists still in this country against the expor- 
tation of gold is a senseless prejudice. The gold is 
not given away ; it is sold, and sold for more than it 
will buy at home ; otherwise it would not be carried 
abroad. There is the same kind of gain as in all 
other exchanges, and this great incidental advantage 
in addition, that, by means of free commerce in the 
precious metals, their general value is kept pretty 
uniform throughout the world, and a chance redun- 
dancy in one cuiTency is drawn off to supply a cor- 
responding deficiency in another. It may be laid 



ON MONEY. 235 

down as an axiom, that no country will export, for 
the sake of getting other things, those things which 
are more needful for its own welfare ; and there 
need not be the slightest fear that any nation which 
cultivates its own advantages under freedom will 
ever lack a sufficient quantum of the precious metals. 
Under freedom, and so long as human nature con- 
tinues what it is, these metals will go, and go in just 
the right proportions, to and from those countries 
which produce and offer in exchange those desirable 
services which other countries want. The greater ' 
the enterprise and skill, the keener the development 
of all peculiar and presently available resources, the 
more honorable and free the commercial system, the 
surer is any nation, whether it be a gold-bearing 
country or not, of securing the gold and silver which 
it needs. This is so, because there w\\\ be a good 
market to buy in, and they who have gold will 
resort thither to buy. But such a nation will also 
want to buy other things besides gold and silver, and 
when enough of the latter are secured for the cur- 
re^ncy and for the arts, the residue will be exported, 
perhaps to the very countries from which it orig- 
inally came, in payment for some products which 
those countries have an advantage in producing. 
The United States is a gold-producing country, and 
exported in the years 1850-1860, both inclusive, 
$502,789,759, coin and bullion ; and during the 
same period we imported from other countries 
$81,270,571, coin and bullion.^ Now, there was a 
double advantage in that exportation. In the first 
place, more and better commodities were secured to 
the country than the gold could have bought in the 

1 Report on the Finances, 1863. 



236 ELEMENTS OF POLITICAL ECONOMY. 

country, for otherwise it would not nave been carried 
abroad ; and, in the second place, this large sum car- 
ried abroad to various countries in exchange, not 
only prevented the disturbing effect on our own cur- 
rency of more than doubling in ten years' time our 
stock of gold, thus inevitably depreciating the whole 
mass, but also, by causing the new gold to impinge 
on the whole world's stock instead of on the cur- 
rency of a single nation, the shock of the new pro- 
duction on the measure of value, though perceptible, 
was reduced and deadened. The world's mass of 
the precious metals is comparatively torpid beneath 
the action of an accretion which would break down 
by its weight the currency of a single nation. There- 
fore, the fluency of gold and silver, by which they 
pass easily in commerce to those places where their 
present value in exchange is greatest, and return as 
easily when the conditions are reversed, tends pow- 
erfully to make their general value unifcrm through- 
out the world, and consequently to make them the 
best medium of exchange and the best measure of 
value. 

((?.) On account of this circumstance, that every 
general rise or fall in the value of gold and silver 
tends to check itself. This principle, indeed, is ap- 
plicable to the value of all commodities, but owing 
to their quantity and durability preeminently appli- 
cable to the value of the precious metals. The check 
is double in either direction. First, let us suppose 
that the purchasing-power of an ounce of gold or 
silver be rising : then, production will be stimulated 
at all the mines, and the more stimulated as the rise 
is more, and the new and enlarged supply will tend 



ON MONEY. 237 

to check a farther rise, and, unless the permanent de- 
mand has been intensified, to bring back the value 
to the old point ; moreover, when there is a rise in 
the value of the coin, there is a less quantity required 
to do the same amount of business, and the demand 
for gold w^hich causes the rise tends to be checked 
by the rise itself, because a less quantity is needed 
in the currency in consequence of the rise. This 
supposes, of course, that the exchanges mediated by 
money are no greater than before. Thus a rise of 
value in gold and silver checks itself by natural 
laws in two ways. Just so of a fall in their value. 
Production is thereby slackened at the mines, and 
the lessened supply tends to enhance value ; and, if 
the same "business is to be done as before, there is a 
stronger demand for currency while the fall con- 
tinues, and this demand tends also to restore the 
value. All this is in the interest of a steady value. 

(/.) On account, lastly, of this circumstance, that 
a stronger demand for currency is met either by 
increasing the stock of coin, or by an increased 
rapidity of circulation of that on hand. A brisker 
demand for money, especially if it be temporary, 
does not necessarily enlarge the supply, or alter the 
value, but only hurry round the existing circulation. 
Oscillations in the demand are responded to by a 
slower or more rapid circulation. This tends most 
admirably to keep the value steady within certain 
limits. When enterprises are multiplying and ex- 
changes are being permanently increased in number 
and variety, then there must be a larger amount of 
money, and this larger amount is secured in the 
ways already indicated, with perhaps slight disturb- 



238 ELEMENTS OF POLITICAL ECONOMY. 

ances of value ; but the temporary ebbs and flows 
of business have no effect at all on the mass of 
money, but only on its movement, and its value con- 
sequently is not disturbed at all. 

These six grounds appear to be satisfactory and 
sufficient to account for the superior steadiness of 
the value of gold and silver, so far as their value is 
determined by considerations relating to the metals 
themselves. We now proceed to the reasons addi- 
tional to this why gold and silver constitute the 
best money. 

(2.) Because they are self- regulating. These 
metals came to be, and continue to be, money, 
independent of the enactments of any government. 
Government indeed coins them for the use of the 
people ; but coinage is nothing in the world but a 
public attest to the quantity and quality of the metal 
contained in the coin. For the trouble and expense 
of assaying, stamping, and thus attesting the quan- 
tity and quality of the metal in the coin, govern- 
ments usually charge the depositors of bullion a 
small seigniorage : Sngland, France, and the United 
States charging at present for gold coins, respec- 
tively, three half-pennies per ounce, which is coined 
into £3 175. 10^^^., i of 1 per cent., and i of 1 per 
cent.; so that a very insignificant part of the value 
of coins is due to the process of coining. The value 
of coined money regulates itself on just the same 
principles as the value of wheat regulates itself, and 
governments are as powerless to alter the one as the 
other. Indeed, the coining of either metal by itself 
is a matter of quantity and quality alone, and not a 
matter of value at all: the United States say by 



ON MONEY. 239 

law that a gold dollar shall consist of 25} grains 
troy, of which nine parts shall be pure and one 
part alloy, but of the value of this dollar thus 
coined the law says nothing. It can say nothing. 
The coin is publicly attested so heavy, so fine, and 
thereafter it takes its chance as to value. All gov- 
ernments have now learned, after oft-repeated and 
always vain trials to regulate the value of their coins, 
that all they can do is to regulate the amount and 
fineness of the metals contained in them. When, 
however, it is designed that both metals shall circu- 
late in the same currency, then it becomes necessary 
that government shall determine, as well as it can, 
not the absolute value of either, but the relative 
value of each in each. And here too the value of 
each, estimated in the other, regulates itself inde- 
pendently of edicts or enactments. If the legislators 
can ascertain in what proportions they are exchang- 
ing for each other in a free market, they may mark 
that as the legal relative value of the two, but they 
must not suppose that their work wiU not require 
revision from time to time. 

The value of gold in silver has differed consider- 
ably in different periods and countries. Julius Caesar 
is said by Suetonius to have exchanged the two o,n 
one occasion at 1 for 9 ; Livy mentions that the rel- 
ative value was 1 to 10 about 189 b. c. ; under the 
early Roman emperors, it was 1 to 12; from Con- 
stantine to Justinian, 1 to 14 or 1 to 15 ; Herodotus 
mentions it as 1 to 13 in Greece, in his day, which 
•was the fifth century before Christ; Plato, a little 
later, calls it 1 to 12 ; in England, before the discov- 
ery of America, it was 1 to 10 or 1 to 11 ; Sir Isaac 



240 ELEMENTS OF POLITICAL ECONOMY. 

Newton in his report to Parliament as master of the 
English mint, in 1717, shows the market rate to have 
been at that date nearly 1 to 15^ ; the last legal 
rating of the two in England, which was also in 
1737, put them at 1 to 15i-; at the same date they 
exchanged in France and Holland at 1 for 14|, which 
made it profitable to export silver from England to 
the. continent ; in China, Japan, and the East Indies 
generally, gold has always been cheap relatively to 
silver (in Japan till 1860, as 1 to 4; since 1860, 1 to 
ISg), which accounts for the stream of silver perpet- 
ually flowing into the Orient ; in 1792, when the mint 
of the United States was established, the legal ratio 
of the two metals was fixed at 1 to 15, which proved 
to be an under-valuation of gold, and tended to drive 
the gold coins abroad; in 1834, the legal ratio was 
changed to 1 to 16, which was going too far in the 
other direction ; the general relative valuation now 
in Europe is 1 to 15^. The law of self-regulation, 
by which both these metals maintain their value rel- 
atively to each other and to all other things, in spite 
of all legal enactments, constituted such a difficulty 
in the w^ay of continuing the double standard, that 
England in 1816, and the United States in 1853, 
practically demonetized silver by degrading the coins 
in weight, so that they pass current at rather more 
than six per cent, above their real value. Conse- 
quently, they are only legal tender in the two coun- 
tries respectively, for 40 shillings and for $5.00. 
Nevertheless the value of silver bullion has steadily 
maintained itself by natural laws. The Bank of 
England is only allowed to hold silver as the basis 
of circulation to the extent of one fourth of the gold 



ON MONEY. 241 

coin and bullion held at any one time ; yet silver 
maintains its own value in spite of these disadvan- 
tages, and is thought to comprise about one fifth of 
the whole metallic circulation of the realm. Be- 
tween 1853 and July 1, 1867, $53,189,216.32 in silver 
coins have come from the United States mint and its 
branches.^ 

It is convenient to have at least two metals in the 
currency, notwithstanding the impossibility of main- 
taining a steady legal relative valuation between 
them. Gold ought to be exclusively the standard; 
it ought to be the only legal tender for large sums; 
but silver coins are useful for the lesser exchanges, 
and there is no present objection to their being de- 
based in weight so as to allow a considerable change 
in the market value of gold in silver to take place 
without disturbing the currency. Another reason for 
the use of both silver and gold in the coinage is the 
increased stability in value thereby secured to the 
whole currency. The immense quantity in the world 
of both metals combined, and the opportunity of re- 
plenishing a chance deficiency of the one from the 
stores of the other, give, in accordance vnth princi- 
ples already explained, a superior stability to value. 
Most currencies, our own included, have also a third 
metal or mixture of metals, to serve the purposes of 
the smallest exchanges, and the coins made of this 
are usually largely overvalued — our nickel cents of 
1857 cost the government about half a cent each — 
and are not legal tender for debts except for very 
small sums. 

It is, then, a principal merit of metallic currencies, 

1 Eeport, Director of the Mint, 1867. 
16 



242 ELEMENTS OF POLITICAL ECONOMY. 

that the gold and silver comprised in them determine 
their own value by natural laws, both relatively to 
each other and to all other purchasable things ; and 
hence the quantity required in each currency of the 
world to do the business of that country is a matter 
which natural laws are perfectly competent to regu- 
late, without any direct action of government ; and 
governments may be relieved from the difficult or 
rather impossible task of determining how much 
money their country shall have. The distribution 
of the precious metals over the earth by commerce, 
according to the wants and circumstances of each 
country, is not perfectly accomplished at present by 
the natural laws which are competent thus to dis- 
tribute them, because some of the nations use still 
some form of credit-money as a part of their cur- 
rency, and also because all the nations have not yet 
come to an agreement as to the degree of fineness of 
the metals used in their respective coinage. These 
obstacles impede somewhat at present the action of 
the comprehensive laws which will one day be 
allowed to control this matter perfectly. Nature 
herself has made the first grand provision for the 
self-regulation of the money of the world, by making 
pure gold and silver of exactly the same quality all 
over the wide earth. No matter where it is mined, 
or when, gold is gold and silver is silver. The gold 
mined to-day in California differs in no essential 
respect from the gold used by Solomon in the con- 
struction of the Temple. So that, if the commercial 
nations would come to a common agreement as to 
the amount of alloy they will put into their coins, 
and then bring these coins, as might easily be done, 



ON MONEY. 243 

into decimal or other easy numerical relations with 
each other, it would be*a matter of indifference to 
every nation whether the coins circulating therein 
were exclusively national coins or not. Foreign 
coins, to the extent to which commerce would natu- 
rally bring them there, would have just the same 
circulation and credit as their own : there would not 
be, as now, the trouble and expense of melting up 
and recoinage ; the balances of trade could be paid 
indifferently in any coinage, and, as we shall soon 
see, every nation would secure without friction or 
legal enactment its due proportion of the money of 
the world. We are not now so far removed from 
this state of things as might at first sight be sup- 
posed. 

At an international monetary conference held at 
Paris during the great Exposition of 1867, many facts 
transpired, and some conclusions were reached, which 
show that a universal coinage for commerce is a 
clearly attainable good. In the first place, by mutual 
convention of their governments, France, Belgium, 
Switzerland, Italy, the Papal States, and Greece, 
numbering in all 72,000,000 souls, have now a com- 
mon money, whose unit is the French franc, the 
multiples and subdivisions of which range deci- 
mally. France has also made a convention with 
Austria, by which that empire agrees to mint a ten- 
florin piece exactly equivalent in weight and fineness 
to the new 25 franc piece, which, in accordance with 
the recommendation of the conference, France has 
promised to mint, in order to facilitate the unifica- 
tion of the money of Great Britain and the United 
States with that of the European continent. This 



244 . ELEMENTS OF POLITICAL ECONOMY. 

adds practically about forty million souls to the sev- 
enty two million already using the franc and its 
multiples. The 25 franc piece will only differ four 
cents in value from the English sovereign, and 
17^ cents from our half eagle. It is the proposal of 
the conference, which included delegates from every 
sovereignty in Europe, and one delegate from the 
United States, that all the nations adopt, (1) a single 
standard exclusively of gold ; (2) coins of equal 
weight and diameter; (8) of equal quality nine 
tenths fine ; (4) the weight of the five-franc gold 
piece, 1612.9 milligrams, to be the universal unit, 
with its multiples; (5) the coins of each nation to 
bear the names and emblems preferred by each, but 
to be legal. tender in all. 

The adoption of these proposals would involve on 
the part of England, together with the recoinage of 
its gold, the change from }i fine to j% fine, and a 
consequent alteration in the weight of the sovereign; 
on the part of the United States, only recoinage, and 
a slight reduction in the weight of the coins. Of 
course, the public creditors would be compensated 
for their loss by the diminished coins, and legal 
allowance would be made for long time contracts. 
Many of the nations of Europe and the two Amer- 
icas now have coins varying but a little in weight 
and fineness from the proposed unit, or its multiples. 
The cost of recoinage is estimated to be about one 
fifth of one per cent, of the value coined. The pro- 
posed unit is recommended by the conference, be- 
cause no other will require so few changes and so 
little expense to unify the money of the world. 
France and the other nations already using this unit 



ON MONEY. 245 

are estimated to have $1,400,000,000 in gold coins 
in circulation. England has less than $500,000,000, 
and the United States not over $300,000,000 of 
coined gold.^ 

Comparatively slight objections weigh against the 
scheme : (1) the expense of recoinages ; (2) disturb- 
ance of contracts public and private ; (3) possible 
derangement of the present relation of the subsidiary 
silver coins to the gold coins, making recoinage of 
the silver necessary; (4) neither the unit, nor any of 
its decimal multiples, present clean metrical numbers 
in weight. This last is a somewhat serious objec- 
tion. The metrical system of weights and measures 
is the best in existence. It is destined to be uni- 
versal. It is already legalized in Great Britain and 
the United States, and widely elsewhere. The five- 
franc unit weighs 1612.9 milligrams. It is a pity 
that it does not weigh 1000, 1500, or 2000 ■ milli- 
grams, that is, 1, 1|, or 2 grams. In that case, the 
coins could be used as weights, and the two systems 
of weight and money would be in vital connection. 
This defect, however, may be remedied in part by 
having clean metrical weights in the subsidiary 
coins. Our five - cent nickel piece, for example, 
weighs just five grams. 

Now, although the Bank of England circulates a 
paper money partly based on government credit, 
and though the United States has under the nation- 
al banking law a similar paper money; yet every 
pound or dollar of this paper money is or is to be 
redeemable in gold and silver; and, as more than 

1 Eeport of S. B. Ruggles to the Department of State. Mr. Ruggles 
was a delegate to, and evidently a leading mind in, the conference. 



246 ELEMENTS OF POLITICAL ECONOMY. 

half the aggregate circulation of Great Britain is 
in metallic money, and as a similar proportion is 
perhaps likely to prevail in the United States, the 
maintenance of a paper money based on credit for 
the home circulation alone may or may not he sound 
financial policy ; but it is evident that it cannot, un- 
der these circumstances, substantially interfere with 
the self-regulation of the metallic money of the 
world. Nevertheless, that we may see with distinct- 
ness the scope and efficiency of the magnificent 
natural law which distributes the precious metals 
over the earth in accordance with the business-wants 
of each nation, let us suppose that there were no 
paper money ; that all the nations minted their met- 
als with a common proportion of alloy ; and that 
the real relative value of the two were ascertained 
by law in the countries where both are legal tender, 
and were well understood also in the other coun- 
tries. In this case there would be no motive to 
debase any part of the coinage to prevent its expor- 
tation, and all the money of all the nations would 
be value-money purely. Now then, money is the 
medium of exchange, and is wanted where the ex- 
changes are, and not elsewhere, and goes of neces- 
sity under freedom whither it is relatively most 
wanted, that is to say, whither the most can be 
obtained for it in exchange. If the country be gold- 
bearing, and its people at the same 4;ime be enter- 
prising in the production of all sorts of services for 
exchange among themselves, they will retain enough 
of their own gold to mediate their own exchanges, 
for the .simple reason that they want it, and have 
services to offer in exchange for it ; and if they have 



ON MONEY. 247 

been allowed in freedom to develop their own pecu- 
liar advantages, no foreign nation can outbid them 
in the offers they are able to make for a sufficient 
quantity of this gold. If foreigners draw away the 
gold from them, it shows that the home people have 
less industry and less skill to produce those things 
which the gold-producers want. The home people 
have the advantage in one respect. They are on the 
spot. There is less expense to them than to foreign- 
ers in transporting the services offered in exchange 
for the gold, and also the gold received in return. 
If, with this advantage, foreigners can still outbid 
them in offers for the gold, it shows that they need 
it most and deserve it most, since they have had the 
industry and the skill to produce that which is pre- 
ferred by the miners to the home services offered, 
and have also overcome an additional obstacle. The 
gold-producer, like every other producer, has the 
right to get the most he can for his service. Who- 
ever can offer him that most has the best right to 
the gold. Therefore the gold goes in the first in- 
stance into their hands, whether natives or foreign- 
ers, who offer the most for it in exchange. If the 
people of the gold-bearing country have equal natu- 
ral advantages with others to produce those things 
which are wanted in exchange for their gold by 
those who practically work the mines, and then fail 
to get the gold they need, the blame lies nowhere 
except on their lack of industry and skill. Let not 
such people think to find any shelter behind natural 
laws. Natural laws are justly and eternally against 
them. If, however, they are naturally placed at a 
disadvantage in respect to tho^e specific products in 



248 ELEMENTS OF POLITICAL ECONOMY. 

demand by the first owners of the gold, they are 
then brought into the same category with non-gold- 
bearing countries. They will then get their gold at 
second hand, and if they deserve it, will be just as 
sure to get it as if they retained it in the first in- 
stance. Every nation has natural advantages in 
some sorts of products. Just so soon as these are 
properly developed, it has some things to offer to the 
world at a better rate than anybody else can offer 
them. Thither, and to buy those things, will gold 
flow, if not directly from the gold-producing lands, 
then indirectly but inevitably, from those lands 
where the gold at present is. Under our supposi- 
tion, it makes no difference where the gold came 
from, or what nation minted it, it is drawn by a 
natural force not to be resisted to that people, 
which, by offering services in general demand, re- 
quires gold to mediate the exchange of those ser- 
vices. Thus, by a law as unerring as gravitation, 
the precious metals make the circuit of the earth, 
abiding certainly in large masses within all the com- 
mercial nations, because there is where they are con- 
stantly wanted and cannot be spared, but passing 
off" also perpetually in smaller masses from all the 
great centres of business towards those points where 
their purchasing-power for the time being is greater 
than at home. The one only impulse that can stir 
the precious metals from their usual haunts, is the 
belief that elsewhere they are worth more in ex- 
changes ; and hence, just as soon as the demand 
for a currency is fairly met in any country by the 
presence of gold and silver, coin ceases to flow 
thither as a permanent thing, but rather ebbs and 



ON MONEY. 249 

r.ows in obedience to the ever-shifting exigencies of 
trade. The nation that does a large business will 
require a large stock of coin, will be able to pay for 
it, and will inevitably secure it; a nation with fewer 
exchanges to make will less need the instrument 
with which exchanges are made, will buy and keep 
a less quantity; and if, in the chances of trade, 
more comes than is needed, it flows off at once to 
the places where the demand for it is stronger; and 
thus the proportionate amount due to the commer- 
cial interests of every nation goes thither under a 
natural law, and abides there under a natural law. 
Hence the general purchasing-power of gold and 
silver tends steadily to an equality the world over. 
If it be appreciably higher in one nation than in 
the others, the metals are drawn toward that nation 
by an irresistible attraction till the equilibrium is re- 
stored. Add to this, that there is at all times a vast 
reservoir of plate from which any sudden or steady 
demand for currency can easily be supplied, and in- 
to which any fortuitous or steady superfluity can 
as readily be drained, and the reasons are apparent 
why gold and silver currencies are self-regulating in 
value and amount. If, on the other hand, a cur- 
rency is to be of paper, independent of gold and 
silver, there is no self-regulation about it : we pass 
at once from the region of natural laws into the 
region of statute and enactment ; somebody must 
take upon themselves to decide how much of this 
paper there shall be, — a power which could not be 
lodged in more dangerous hands than in those which 
thought themselves competent to exercise it. 

(3.) Because they are conveniently portable, divis- 



250 ELEMENTS OF POLITICAL ECONOMY. 

ible, and impressible. Our proposition is, that gold 
and silver constitute the best money ; and in proof 
of this we have already demonstrated the steadiness 
of their value, and their self-regulating power ; inci- 
dental to these great advantages are the material 
qualities of these metals, by which they are admi- 
rably fitted to be the money of the nations. Their 
weight is little relatively to their value. A thousand 
dollars in gold are not indeed carried so easily as a 
bill of exchange or a bank-note ; and expedients are 
easily adopted, and always have been used, by 
which the transfer in place of large masses of coin 
is for the most part obviated ; and our proposition 
does not deprecate at all the use, of the economiz- 
ing expedients of commerce; but for the money of 
the people, for the currency that passes from hand 
to hand in ordinary exchanges, we maintain that 
gold and silver are sufficiently portable. One troy 
pound of English sovereigns, which one can put in 
a glove-finger and carry in his vest-pocket, almost 
without knov/ing it, is worth about $230 ; and the 
experience of those countries, like France and Ger- 
many at present, where the money is mostly metallic, 
has not pronounced it onerous on account of its 
weight. At any rate, it is better to accept all the 
other immense advantages of gold and silver money, 
together with a little inconvenience as to weight, if 
one chooses to insist on that, than to adopt substi- 
tutes every way inferior as money, except that they 
are lighter in our purses. 

Moreover, gold and silver differ from jewels, and 
most other precious things, in that masses of them 
are divisible, without any loss of value, into pieces 



ON MONEY. 2 "4 

of any required size. The aggregate of pieces is 
worth as much as the mass, and the mass as much 
as the pieces. For currency purposes this is a great 
advantage. For its- utmost convenience, business 
requires a considerable variety of coins, and if any 
of these kinds be minted in quantity in excess of 
the demand, nothing more is required than to remint 
them in other denominations, and their whole value 
is saved to the currency in the most convenient 
form. It is this quality which enables coins to flow 
into plate whenever the metal in them becomes 
more valuable in the form of plate, and plate again 
to flow back into coins whenever the metal in it is 
more in demand as coin. 

Lastly, these metals are capable of receiving and 
retaining any stamp which government chooses to 
impress upon them. A certain proportion of alloy, 
say tVj hardens them to such a degree that they ex- 
hibit with sharp distinctness the cut of the die, and 
permanently retain its impress. This quality of the 
metals, when they are skilfully coined by the im- 
proved machinery of modern times, makes the 
pieces of money objects of beauty, and practically 
indestructible also, since the perfect circular form, 
the device covering the whole piece, the milled and 
fluted edges, make clipping without detection im- 
possible, while the hardness of the pieces makes the 
annual loss of weight by abrasion scarcely appre- 
ciable. The Director of the United States Mint, in 
his Report for 1862, gives the results of some care- 
ful and comprehensive experiments made at the 
mint to ascertain the yearly loss of coins by the 
ordinary wear and tear of circulation. These re- 



252 ELEMENTS OF POLITICAL ECONOMY. 

suits are exceedingly interesting and important, and 
throw to the winds the haphazard conjectures of a 
host of writers on either side of the Atlantic. On 
our silver coins, taken promiscuously, the average 
annual loss from abrasion was ascertained to be 
one part in 630 ; while the gold coins were tested 
separately, with this satisfactory conclusion, that the 
half-eagle averages a loss per annum of one part in 
3550, the double-eagle one in 9000 ; and a cautious 
estimate as to the proportions of the various sizes 
of coin actually in circulation in the United States, 
made of the two metals, leads consequently to the 
conviction that the average yearly waste by wear on 
all the coins does not exceed one part in 2400. The 
cost, therefore, of maintaining a metallic circulation 
is by no means so great as it has been usually repre- 
sented. An instrument in constant use that requires 
only 24^^ of its value for its yearly repair, and per- 
forms exceeding well the most delicate and impor- 
tant functions, is a cheap and durable instrument. 

From these three main reasons, we conclude that 
gold and silver are the best money. 

4. An inferior money, so long as it circulates at all, 
invariably drives a superior money out of the circula- 
tion. 

This is a fundamental law of finance, and has 
been illustrated over and over again in every age and 
nation. It is as solid as the substance of truth can 
make it, though it looks at first sight like a paradox. 
We naturally think that what is excellent tends 
rather to displace what is inferior, but with money 
the exact reverse is the law, and the perfect coin of 
full weight, instead of driving out the light and the 



ON MONEY. 253 

debased pieces, is always itself driven out of the 
circulation by them. The reason is obvious from 
the nature of money. Money is merely an instru- 
ment of exchange, and nobody wants it except to 
buy with, and so long as the government and the 
community treat light coin and full coin as of equal 
value, receiving them indifferently in payment of 
debts and of taxes, it is clear that nobody will give 
in payment of debts and of taxes that which is really 
worth more so long as that which is really worth less 
will go just as far. The inferior pieces will abide in 
a market where they will fetch just as much as the 
superior pieces, while the superior pieces will take 
on a form or migrate to a place in which some 
advantage can be gained from their superiority. 
Thrown into the crucible, or exported in commerce, 
this superiority immediately manifests itself; and 
therefore into the crucible or into the channels of 
foreign trade it might be confidently predicted before- 
hand that such money would be thrown, and all ex- 
perience testifies with one voice that exactly those 
are the destinations of such money. Mr. Macaulay, 
in the twenty-first chapter of his history, mentions 
that Aristophanes, the Greek comic poet, in the fifth 
century before Christ, was the first writer who has 
noticed the fact that where good money and bad 
money are thrown in together the bad money drives 
out the good. The verses of the poet allude to the 
tendency as well known, and refer it to the naturally 
depraved taste of his fellow-citizens, like that which 
led them to entrust state affairs to such men as 
Cleon, whom he was satirizing ; but, in truth, as we 
have seen, the tendency results from the common 



254 ELEMENTS OF POLITICAL ECONOMY. 

sense of men, which revolts at the idea of using a 
dearer instrument when a cheaper one will answer 
just the same purpose. 

Out of a crowd of good illustrations of this law, I 
shall first select two which occurred in purely metal- 
lic currencies. The Dutch city of Amsterdam be- 
came in the seventeenth century a centre of trade 
for all Europe. The mercantile honor and solid 
financial ability of its merchants was proverbial all 
over the world ; and yet it was noticed, about the 
year 1609, that bills of exchange on Amsterdam 
w^ere always below par in other countries. The 
merchants had never failed to meet all the paper 
drawn on them with the utmost promptness, and the 
discount on this paper in other markets was a won- 
der to everybody. On searcli, however, it was found 
that the cause of all this was in the currency of the 
city. The extensive trade of Amsterdam brought 
into it large quantities of dipt and worn foreign coin, 
which circulated in the currency of the city, and 
reduced its value about nine per cent, below that of 
good money fresh from the mint. It was noticed, 
that the good money of full weight which the mint 
of Amsterdam poured into the circulation by wagon- 
loads, did not stay in the circulation ; that very few 
of such pieces were told out in the daily exchanges ; 
it was ascertained that they were melted up, or 
carried away to other countries, in either of which 
cases their value corresponded to the value due to 
their weight and fineness, while at home in the cur- 
rency their value only corresponded to the average 
value of the depreciated coins which constituted the 
bulk of the circulation. Bills of exchange, conse- 



ON MONET. 255 

quently, drawn on Amsterdam were liable to be 
paid in this depreciated coin, and the exchange was 
against the city even more than the coin was depre- 
ciated ; because, the currency in such an uncertain 
state was naturally valued abroad even below what 
it ■v\as really worth. To meet this state of things, 
and bring up its exclianges to par, the city of Am- 
sterdam, in 1609, established its celebrated bank. 
The bank received the dipt and worn coin which 
was circulating in the city, at its true value accord- 
ing to present weight and fineness, and after deduct- 
^ing a small charge for expense of recoining, and 
another small charge for management, gave a credit 
on its books for the remainder. This credit was 
called bank-money ; it represented, guilder for guilder, 
money actually in deposit, and money too exactly 
according to the standard of the mint. The city 
ordered that all bills drawn on Amsterdam of more 
than six hundred guilders' value, should be paid in 
bank-money ; thus every considerable merchant was 
obliged to open an accountwith the bank, and make 
his deposit. This instantly took away all uncertainty 
from bills of exchange drawn on Amsterdam. They 
went up to par at once in every market in Europe. 
This was the basis of the simple and beneficent 
operations of the Bank of Amsterdam, an institution 
which enjoyed unlimited credit in the commercial 
world for nearly two hundred years. The conven- 
ience of this bank-money; its unvarying character; its 
security from fire, robbery, and other accidents ; the 
fact that the city was bound for it; and the demand 
for it occasioned by the fact that every merchant 
must have some of it,, that is, must keep an account 



256 ELEMENTS OF POLITICAL ECONOMY. 

with the bank, in order to pay his foreign bills of 
exchange, gave the certificate of deposit, or the bank- 
money, a constant premium of about five per cent, 
over the good coin of full weight which came into 
circulation without difficulty as soon as the poorer 
coins were drawn into the bank for recoinage. 

At the close of the same century, a similar series 
of events occurred on a much larger scale in Eng- 
land.i The old silver coinage of England was by a 
rude process introduced into that country by artists 
from Florence as early as the thirteenth century. 
The pieces were shaped and stamped by the hammer.' 
They contained some a little less and some a little 
more than the due amount of silver ; few of them 
were perfectly circular ; the edges were neither milled 
nor fluted ; the image of the sovereign occupied the 
centre of the pieces, and the superscription ran around 
the edge, but not so near it as that the letters were 
necessarily impaired by a little clipping. Conse- 
quently it was easy to pare off a pennyworth or two 
of silver from the crowns, half-crowns, and shillings, 
and then pass them along. It became a profitable 
branch of industry. It was in vain that Elizabeth 
enacted that the clipper should be henceforth liable 
to the penalties of high treason. About the time of 
the Restoration, that is, about 1660, it was noticed 
that a large proportion of the silver coin of the 
realm had undergone some degree of mutilation. 
At that time a new process of coinage was brought 
in. A mill worked by horses fabricated the new 
coins on better principles. They were exactly round, 
and the edges were inscribed with a legend, and they 

1 Macaulay's History, Chap. 21. 



ON MONEY. 257 

were all of just and equal weight. They were 
thrown out into the circulation to pass current with 
the hammered money, and it seems to have been 
expected that they would soon come to displace it. 
But they did not. Both were received at first with- 
out distinction by the individual traders and by the 
public tax-gatherers. But it was not long before the 
milled money was noticed to be scarce. One hardly 
saw a piece of it in a fortnight. The horses at the 
mint were all the time tugging away, and the bags 
of fresh money were carried continually from London 
Tower to London town, but the new money never- 
theless became scarcer every day. In the payments 
made at the Treasury not one piece in two hundred 
was milled silver, and a merchant complained that, 
being paid a debt of thirty-five pounds, he only got 
one half-crown of good money. Indeed, the money 
was getting perpetually worse. False coiners mul- 
tiplied, and clippers abounded more and more. The 
penalties of an extreme law were utterly powerless 
to restrain the mutilation of the coins; until, at length, 
public opinion decidedly turned against the promis- 
cuous hanging of clippers; officers were reluctant to 
arrest, and juries reluctant to convict, and the people 
sympathized with the sufferers as only guilty of a 
moderate fault. Thus things went on till 1695. 
The lighter the old coins became, the scarcer became 
the new ones ; for who would pay two ounces of 
silver when one ounce was legal tender? The new 
money was melted, was exported, was hoarded, but 
circulate it would not. At length the lightest pieces 
began to be refused by some people, and other peo- 
ple demanded that their silver should be paid to them 

17 



258 ELEMENTS OF POLITICAL ECONOMY. 

by weight and not by tale, and there was wrangling 
over every counter, and a dispute at every settlement, 
and the coin was really so diverse in its value that 
there was no longer any measure of value in the 
kingdom ; business was in utmost confusion, society 
was by the ears, poor people were unmercifully 
fleeced, and shrewd ones grew enormously rich ; 
and the Jacobites secretly exulted in the hope of 
being able to avail themselves of the prevailing dis- 
content to overthrow the scarcely established revolu- 
tionary government of William and Mary ; when, 
by the joint counsels of two such philosophers as 
Locke and Newton, and two such statesmen as 
Somers and Montague, the government took the 
bold resolution of recoining all the silver of the king- 
dom. An early day was fixed by Parliament, after 
which no clipped money could pass except in pay- 
ments to, government, and a later day after which it 
could not pass at all. It was wisely determined that 
the loss on the clipped money should be borne by the 
whole public, and not by the present holders of it ; 
and it was estimated that £1,200,000 would be re- 
quired to make up the currency to the old standard 
of weight and fineness; and this sum the Bank of 
England, just established, was willing to advance 
on the security of some new and good tax; and the 
window-tax was passed to raise the money ; the old 
coins were rapidly drawn in, melted up, and re- 
coined, and thereafter there was no difficulty in 
keeping the circulation full of milled pieces of full 
weight. 

In mixed currencies, the financial law we are now 
treating has a similar, but if possible a more disas- 



ON MONEY. 259 

trous operation. If the paper in circulation be not 
nominally redeemable in gold and silver, then as 
soon as it depreciates below the value of gold and 
silver, as such paper has never yet failed to depreci- 
ate in a short time, it drives the metals completely 
out of the circulation, and keeps them out just so 
long as itself circulates, or until the quantity of such 
paper is so reduced and its character so improved 
that it rises again to a par value with the metals, in 
which case, though it has never to my knowledge 
actually occun-ed, the metals would come back into 
the currency alongside of the paper. The sudden- 
ness and the thoroughness with which the gold and 
silver will abandon a currency of which a depreci- 
ated, irredeemable paper forms a part, was illustrated 
on a large scale in this country in 1862. A gigantic 
civil war had been in progress in the nation for a 
year ; difficulties and disasters had thickened around 
the path of the government ; its financial embarrass- 
ments were of the most formidable kind ; and yet, 
until April of that year, 1862, the paper money of the 
loyal States, which consisted of about $140,000,000 
of bills of the various State banks, had not much 
depreciated as compared wnth coin. Li January, 
indeed, when the national government had added to 
this mass of paper about $30,000,000 of demand- 
notes, gold was at a premium of five per cent. ; but 
as soon as the law authorizing the issue of national 
legal-tender notes was passed, the government drew 
in the demand-notes, and for a little interval the 
paper currency was reduced to about $140,000,000, 
and on the first day of April, when the legal-tenders 
were ready for circulation but not yet issued, the 



260 ELEMENTS OF POLITICAL ECONOMY. 

coin bore a premium of only one per cent. It had 
not yet in any sense abandoned the circulation. The 
State banks had all suspended specie payments on 
the last day of the preceding year, but had not yet 
much expanded their usual circulation. And now 
it is to be noticed that the steady depreciation of the 
paper currency of the country, both state and national, 
commenced at the very time when the national legal- 
tender notes were thrown into the circulation. All 
the paper was now irredeemable, and its volume was 
now expanded, and the depreciation began ; it was 
liable to still further expansion, both from the absence 
of restraint on the circulation of the State banks and 
from the urgent necessities of government leading to 
the issue of more legal-tenders, and the depreciation 
continued. In May gold bore three per cent., June 
nine per cent., July fifteen per cent., September twen- 
ty-one per cent., October twenty-nine per cent., and 
December thirty-two per cent. Step by step, as the 
volume of the currency increased, did its value de- 
crease as compared with gold ; and what is more to 
the present purpose, no sooner did the depreciation 
become sensible, than the scarcity of coin became 
sensible also, and in a very few weeks' time the 
currency was swept utterly bare of metallic money. 
The gold went first, and then the silver ; and a little 
later even the copper cents followed the example ; 
and the government was obliged to authorize the 
use of its postage and revenue stamps for small 
change ; and, until it was prohibited by law, cities, 
corporations, and individuals issued shinplasters and 
metal tokens of various kinds to take the place of 



OiSr MONEY. 261 

the small coins. This present writing is at the au- 
tumnal equinox of 1868, but with the exception of a 
few of the cents, the coins have not yet returned to 
the circulation, for the sufficient reason that the paper- 
money is still depreciated as compared with them. 
The war is over, peace has returned, business is re- 
viving, and a career of unprecedented prosperity is 
opening up before the country, but the coins have 
not come back, and, under the commonest principles 
of human nature, cannot come back, until the paper 
dollar of the country is equal in purchasing-power to 
the gold dollar, and is redeemable in that. Since 
April 1st, 1862, the paper money has varied from 
less than one to sixty-five per cent, below par, and 
is to-day thirty-one per cent, below par. 

So long as the paper money of a country is nomi- 
nally redeemable in gold and silver, the operation of 
the law we have in hand is somewhat peculiar. In 
times of ordinary confidence and prosperity the paper 
and the coin circulate indifferently together, and 
an undue increase of the paper beyond the just de- 
mands of business does not indicate itself in a pre- 
mium on the coin, but each part of the whole cur- 
rency suffei's a diminution in value, which is of course 
indicated in a general rise of prices. There is noth- 
ing anomalous in this, for increase of supply, other 
things as before, always lowers the value of any- 
thing; and the direct interest of the parties who 
furnish the paper leads them to increase their circu- 
lation as much as they fairfy, and sometimes as 
much as they unfairly, can. But a market in which 
prices are high and gold is still circulating is a good 
market to sell in, and increased importations never 



262 ELEMENTS OF POLITICAL ECONOMY. 

fail to accompany a rise of prices caused by the de- 
preciation of a mixed currency. In the home market 
the paper is still as good as gold, but to pay the 
balances in a foreign trade it is good for nothing. 
The natural superiority of the gold to paper appears 
as soon as a payment is to be made abroad. In 
obedience to this impulse gold natm'ally and inevita- 
bly goes abroad ; and it has repeatedly gone abroad 
under these circumstances from the United States to 
such an extent that the parties who furnished the 
paper, that is to say, the banks, could no longer re- 
deem their paper in coin, but were obliged to suspend 
specie payments, which is a euphonious circumlocu- 
tion to express going into temporary or permanent 
bankruptcy. In this case also, though less directly, 
the inferior money pushes the superior out of circu- 
lation. I have no hesitation in calling the paper the 
inferior money, both for other potent reasons soon to 
be specified, and because at any rate it is powerless 
in international exchanges. There is believed to be 
nothing in the monetary history of the United States, 
as there is certainly nothing in the known principles 
of human nature, which does not abundantly con- 
firm as a universal truth the proposition in hand, 
namely, that worse and better money being in the 
currency together, the worse will expel the better 
sooner or later; sometimes into hoards, sometimes 
into the melting-pot, and sometimes out of the coun- 
try. 

5. A paper money is only tolerable when it is actu- 
ally and iyistantly convertible on demand into gold and 
silver. 

I feel no hesitation in using the term paper-money 



ON MONEY. 263 

although many high authorities will not concede that 
any form of paper can be money at all. They make 
a distinction between currency and money. The 
discussions in this chapter thus far have been pur- 
posely made so general as that the principles will ap- 
ply to a money of paper as well as to a money of coin. 
Any form of value that circulates generally among all 
classes of people as a medium in their exchanges may 
be allowed to be called money. The essential char- 
acteristic of money is its possession of a generalized 
purchasing power. For a reason soon to be given, 
gold and silver in any form have a more general pur- 
chasing power throughout the world than any form 
of paper can have ; and yet the paper that the 
masses of the people accept as a medium in any 
country, may be regarded as money in that country. 
Checks, drafts, bills of exchange, and so on, are not 
money under the definition. This is a distinction 
recognized in common language, and science has no 
motive to disturb it. The signification of the terra 
money merely marks the fact of a general circula- 
tion, and determines nothing in respect to the nature 
or usefulness of a particular medium. The word 
money is derived from the Latin moneta, the mint or 
place where money was coined. The mint of Rome 
was a building on the Capitoline, and attached to 
the temple of Juno Moneta, as the serarium was to 
the temple of Saturn. The epithet of the goddess 
passed over first to the mint, and then to that which 
was coined there. 

But while nothing seems to me to be gained by 
refusing the courtesy of the terra money to any form 
of value which a people choose to eraploy as a me- 



264 ELEMENTS OF POLITICAL ECONOMY. 

dium, there is a distinction of the utmost importance 
between coin money and paper money. Coin money 
is the definite thing, which paper money promises to 
pay to bearer. What is a dollar ? A dollar is 25| 
grains of a metal compound, of which nine parts are 
pure gold and one part is a hardening alloy. It is a 
definite quantity of a definite thing. Government is 
competent, if it pleases, to alter the quantity of gold 
that shall constitute a dollar; but it is not practically 
competent to make a dollar out of anything else 
than gold. Our government gave up long ago the 
attempt to make a dollar even out of silver. After 
every change in the mint laws, a dollar is, and will 
remain, a definite quantity of gold alloyed. What 
is a dollar bill ? It is a promise of the issuer to pay 
to bearer this definite quantity of alloyed gold. 
There is no mystery here. A dollar is a tangible 
commodity. A dollar bill is a promise to give this 
commodity to bearer. The subject of Credit will be 
treated at length in the chapter following the next ; 
but it will be plain to every reader, without a techni- 
cal definition, that a promise received involves the 
element of credit. In an exchange proper, two 
services are reciprocally rendered by two persons, 
and the transaction is then and there terminated ; 
but in simple credit, one service is rendered, and the 
return service is delayed, and usually some paper 
evidence that such service is due springs up in con- 
nection with the transaction. It is an exchange 
begun, but not yet consummated, and no matter 
through how many hands the paper evidence may 
pass, it is nothing but an obligation resting on some- 
body to pay to somebody the return for a service 



ON MONEY. 265 

which has been actually rendered. Now the grand 
distinction, and one of the utmost importance, be- 
tween gold and silver money and paper money is, 
that paper money always has in it the element of 
credit, while the other has in it no element of credit 
at all. A gold eagle is not a sign of anything, it is 
not the representative of anything ; it stands in its 
own right, just as a bushel of wheat does ; it is true 
that its only use as money is to purchase other things, 
but its purchasing-power is within a trifle as great 
whether it be in the form of money or bullion ; and 
therefore a service that is paid for in specie closes 
up the transaction completely, the exchange is con- 
summated, there is no element of delay, of promise, 
of credit in such an exchange. It is just as when 
the miller renders a bushel of corn to his neighbor, 
and that neighbor renders him a day's labor in re- 
turn. In both cases, there is an end. But paper 
money is credit-money. It may be more convenient 
than coin money ; its value, that is to say, its pur- 
chasing-power, may be equal to that of coin money; 
it may even in some circumstances bear a premium 
over coin money ; but all this does not alter the fact 
that there is in it an unlucky element, an unstable 
element, an element which, as men are, is liable to 
some suspicion, the element, namely, of a present 
promise to be fulfilled in future. Paper money walks 
by faith, and not by sight. It is the sign, and not the 
thing signified. It is the representative of something, 
and not that something itself. It is a promise to 
pay, and not the pay itself. It is a credit, and not a 
quittance. And what makes this very certain is, that 
aU paper money knows it to be true about itself. It 



666 ELEMENTS OF POLITICAL ECONOMY. 

bears this truth stamped on its very face. It does not 
even' profess to stand on its own bottom, but Jeans 
consciously and conspicuously on some solid support. 
The French assignats promised to redeem themselves 
in land ; the continental bills of the old American 
Congress were all to be paid in Spanish milled dol- 
lars ; the bills of the Bank of England profess to be 
and are, redeemable in gold and silver; the present 
irredeemable legal-tender notes of the United States 
and the new national bank bills, are all in terms 
promises to pay to bearer so many legal dollars of 
the United States, that is, so many times 25f grains 
of gold standard fine. These promises have been 
long dishonored. 

Since, then, the various forms of paper money 
even the best of them, are mere promises to pay on 
demand, it must be conceded that they are credit- 
money; and the question is narrowed down to this, 
whether the functions of money can be well per- 
formed by the evidences of an obligation to pay for 
services already received. It is not denied that such 
evidences frequently have value, that their value is 
sometimes equal and sometimes superior to an equiv- 
alent sum in gold; the question is whether in their 
nature they can constitute a good money. In re- 
solving this question, it must be noticed, that the 
fact of indebtedness is not of itself an evidence of 
an ability to pay: individuals, corporations, and gov- 
ernments have often become bankrupt through the 
dispi'oportion of indebtedness to ability. It must be 
noticed, also, that, in the light of human nature and 
experience, men in all capacities are more or less 
willing to accept the services of others without ren- 



ON MONEY. 267 

dering the equivalent return, even when their obliga- 
tion to render it be certified on paper ; also that the 
willingness of people to accept, in return for actual 
services rendered, mere promises to pay in future, by 
whomsoever issued, is quite different at different times 
— in times of confidence and prosperity they may be 
readily accepted, in times of disaster and peril all 
men prefer payment to promise. The functions of 
money are two : to serve as a medium of exchange, 
and to serve as a measure of value. To fulfil the 
first office well, money should be a commodity at all 
times acceptable to all men in return for services ren- 
dered ; to perform the second function well, money 
should be as uniform as possible in quality, and vary 
in quantity according to the shifting demands of ex- 
change, and not otherwise ; in short, vary in quantity 
just as a good metallic currency does vary undei 
natural laws alone. But credit-money is unfitted 
by its very nature to do well these two things ; first, 
because it never has been, and in the nature of things 
never can be, acceptable to all men at all times in 
exchange for services even within the country itself, 
and in international exchanges it is not acceptable 
at all ; and second, because, as has been already 
shown, a steady measure of value necessitates a 
steady value of the money, and the value of credit 
must certainly be as variable as the character of the 
issuers for integrity and solvency. Add to this, that 
the value of credit-money, like the value of every- 
thing else, depends in part on the supply, and the 
supply will vary with the varying disposition of the 
people to accept it, and thus the measure of value 
will be varied. It is in vain to talk, as too many do 



268 ELEMENTS OF POLITICAL ECONOMY. 

in this connection, of the self-interest of the issuers, 
and of their honor, and so on ; self-in*3rest should 
keep men from becoming bankrupts, yet men do 
become bankrupt; honor forbids indeed the escaping 
from a debt, yet debts are escaped from. On prin- 
ciples merely, it would be as certain beforehand as 
any such truth can be, that credit-money, from the 
nature of credit, could not properly perform the two 
delicate and important functions of money. 

We see, then, precisely, the nature of paper money. 
It is made up of promises made by somebody to pay 
to somebody else a definite weight of coined metal. 
All civilized countries now make a certain weight of 
gold or silver bullion their acknowledged standard 
of value; and, accordingly, paper money can only 
be based upon specie, since specie is the only thing 
that can be meant, when the promise is to pay 
pounds, dollars, gulden, francs. Specie is indeed a 
commodity, like other commodities, but then it is 
the only commodity that is the accepted medium of 
exchange in civilized countries ; and therefore, all 
attempts to base a paper money upon land, wheat, 
cotton, mercantile bills, or any other valuable thing, 
involve a direct contradiction in terms. Our propo- 
sition is, that paper money is only tolerable when it 
is instantly convertible into coin ; which is the same 
as to say, that a promise is only good when it is kept. 
An inconvertible paper money is only another name 
for a promise unfulfilled ; and no intelligent person 
will ever wonder that unfulfilled promises to pay in- 
variably become less valuable than that which they 
promise to pay. This is the simple secret of the 
inevitable depreciation of all inconvertible money, as 



ON- MONEY. 269 

soon as the amount of it passes a certain limit. 
Even a convertible money, if, by any expedients, the 
amount of it, together with the coin in circulation, 
become greater than the volume of coin alone would 
be then and there, will diminish in value, not indeed 
as compared with specie, but as compared with com- 
modities, that is, general prices will rise. All the 
principles of this whole discussion hinge on the fun- 
damental truth, that money is a medium of exchange. 
Because it is a medium^ only a certain amount of 
it is ever needed at any time to do the healthy busi- 
ness of any country. This limit of quantity not 
being overpassed, paper promises to pay, provided 
they are only kept, will constitute a tolerable money. 
That this limit of quantity is apt to be overpassed, 
whenever paper money is used, whether it be incon- 
vertible or nominally convertible ; and also, that a 
paper money can never be successfully based on 
anything but gold and silver, the subjoined histori- 
cal examples will abundantly confirm. 

John Law was born in Edinburgh, in 1671, and 
died in Venice, in 1729. Son of a goldsmith, he 
received an excellent education, and early manifested 
an acute intellect and a talent for finance, but was 
also notorious as a gambler and debauchee. He 
was the first to give scientific form and color to the 
theory (a theory that is still working in many minds) 
that money represents commodities, and may be 
based upon their value. He published this theory 
in a tract, in 1705; but endeavored in vain to per- 
suade the government of Scotland to found a bank 
upon his principles. He then carried his scheme to 
Paris, and was again repulsed ; and after a residence 



270 ELEMENTS OF POLITICAL ECONOMY. 

in many cities, in which he gambled successfully, 
and talked finance to princes and statesmen fasci- 
natingly, he returned to Paris in 1715, with his ill- 
gotten fortune, gained the ear of the E^egent Duke 
of Orleans, presented to him a memorial containing 
many sound principles of monetary science combined 
with the fundamental vice of his system, and was 
allowed by him the next year to found a bank em- 
bodying to a certain extent the new idea. The idea 
may be well expressed in Law's own words: — '-'■Any 
goods thai have the qualities necessary in money, 
may be made money equal to their value. Five ounces 
of gold is equal in value to X20, and may be made 
money to that value ; an acre of land is equal to <£20, 
and may be made money equal to that value, for it has 
all the qualities necessary in money." For a couple 
of years, or so, Law's bank surpassed all hopes. 
Based on specie and on state debts, it paid its notes 
promptly in coin, and these for a time even bore a 
premium over coin. Law had touched a spring till 
then but little known in France, the potent spring of 
Credit. But his whole thought, meditated on for 
years, could not be expressed through a private bank. 
The State should be a banker ; it should collect all 
its revenues into a central bank, and attract the 
money of individuals to it as deposits ; besides, the 
State has public property of vast value, on the 
strength of which paper money can be emitted and 
made legal tender; and thus the State, instead of 
borrowing, should lend to all on easy terms, and the 
profits thus accruing would lessen or abolish taxes. 
Nor was this all. The State should also be a mer- 
chant; the whole nation should form a commercial 



ON MONEY. 271 

company, a body of traders, whose common treasury 
should be the State bank. Commerce by individuals 
creates great wealth; why should not the organized 
commerce of a State make everybody rich ? The 
discounts of the bank, and the profits of the trade, 
would surely provide for the public service without 
taxation. These vast ideas were actually carried 
out. Law's bank became the Royal Bank, issuing 
•a paper money guaranteed by the State and resting 
back upon the value of all national property. The 
money was receivable in taxes, nominally redeem- 
able in coin, and made a legal tender. It actually 
bore at one time five and ten per cent, premium over 
gold and silver. People were anxious to exchange 
their coin for notes. Meanwhile a commercial com- 
pany was formed in connection with the bank, to 
which the State ceded at first the monopoly of the 
commerce of Louisiana and of the Canada beaver 
trade for twenty-five years, and the soil of Louisiana 
■forever; under the auspices of which New Orleans 
was founded, and named from the Regent, the patron 
of the grand system ; and in succession, the monop- 
oly of tobaccos, the rights of the Senegal Company, 
of the East India Company, of the China Company, 
and of the Barbary Company; until, having almost 
all the commerce of France outside of Europe in 
its hands, it entitled itself the Company of the 
Indies. Its shares rose from a par value of 500 
francs, to 10,000 francs, more than forty times their 
value in specie at their first emission. To support 
such speculations, which completely turned the heads 
of all classes of the people, the amount of paper 
money reached at last the sum of 3,071,000,000 



272 ELEMENTS OF POLITICAL ECONOMY. 

francs, 833,000,000 more than had been legally- 
authorized to be emitted. The collapse of this most 
gigantic financial bubble of history was terrific. Be- 
fore the close of 1720, the shares of the Company 
could be bought for a louis d'or, and the paper 
money became worthless. ^ Nevertheless, Law was 
a great man. His accounts in all these immense 
transactions were as clear as daylight. He believed 
in his system till the day of his death, and referred 
its failure to the caprices of a despotic government. 
His mind too much loved unity, and his plan gave 
too little scope to individual liberty. But the central 
vice of all was a mistake as to the nature of money. 
Money is a medium, and its amount cannot be in- 
creased beyond a certain limit without disaster. 
Moreover money does not represent the commodities 
which it helps to exchange, any more than ships 
represent the cargoes which they carry. 

Thus Law's paper money ran its course in about 
four years. Again at the close of the century France 
tested the merits of paper money, and the principle 
that money may represent commodities, on a grand 
scale. As the great revolution went forward, and a 
scarcity of money was experienced, the National 
Assembly, in the spring of 1790, issued, under the 
name of " assignats," a paper money based on the 
value of the lands of the Church which had been 
confiscated to the State. The assignats were receiv- 
able in payment for these landed estates at any 
public sale of the same. They also bore interest at 

1 Martin's Decline of the Monarchy, chap. i. Macleod's Theory and 
Practice of Banking, chap. xi. Bancroft's United States, chap, xxiii. New 
Am. Cycle, Art. John Law. 



ON MONEY. 273 

four per centum. The first emission was 400,000,000 
francs — about one fifth the value of the confiscated 
lands. In September, 800,000,000 niore were author- 
ized, Talleyrand opposing and Mirabeau strongly 
urging these additional issues. " It is in vain," said 
Mirabeau, "to compare assignats, secured on the 
solid basis of these domains, to an ordinary paper 
currency possessing a forced circulation. They rep- 
resent real property, the most secure of all posses- 
sions, the land on which we tread." Nevertheless, 
by June 1791, they had lost one third their value. 
The government in alarm, while issuing on the one 
hand enormous quantities of the paper to meet the 
vast expenses of the Revolution, which quantities 
were swelled by skillful counterfeiters in the prisons 
and elsewhere, took strong measures on the other to 
prop up their market value ; the use of coin was pro- 
hibited; a maximum price in assignats for everything 
was established by law; heavy penalties and at last 
death were decreed against those who refused to 
receive them at par; but it was all in vain. "Down 
they w^ent,!' says Carlyle, " with an alacrity beyond 
parallel." In June, 1793, the assignats had fallen to 
33, and in August to 16 per cent. Renewed con- 
fiscations kept the estimated value of the public 
domains far in advance of the par value of the assig- 
nats based upon them ; but this had no tendency to 
prevent the depreciation of the assignats, because 
money is a medium of exchang-e, and its proper 
amount has no relation to the estimated value of 
any commodities at all. In January, 1796, the assig- 
nats in circulation amounted to 50,000,000,000 francs, 
and had fallen to one thousandth part of their nom- 
18 



274 ELEMENTS OF POLITICAL ECONOMY. 

inal value, that is, to one tenth of one per centum. 
The government then offered to redeem them at 30 
for 1 in " mandats," which entitled the bearer to take 
immediate possession, at their estimated value, of 
any of the lands pledged by the assignats. The first 
emission of mandats kept up for a little to 80 per 
cent, of their . nominal value, but a newand large 
emission sent the whole of them down about where 
the assignats were. A decree of July 10, 1796, 
ended the matter by permitting any one to do busi- 
ness in any money he chose ; and business, which 
had practically ceased under the paper money, re- 
vived again at the sight of the coin, which, of course, 
had been out of circulation. Thus the assignats had 
a course of about six years. The distress and con- 
sternation into which a country falls when its meas- 
ure of value is disturbed and destroyed, as it was by 
the issue of the assignats, is past all powers of de- 
scription. There can be no doubt that these assig- 
nats caused more suffering in the French Revolution, 
a hundred fold, than the prisons and the guillotine. 
It may be said that the government ought not to 
have issued them in such quantities. Perhaps it 
ought not. But there never has been a government 
yet, of the many which have issued irredeemable 
^aper, which had the wisdom and the firmness to 
resist for any great length of time the temptation to 
emit large quantities. There is no stopping when 
once the issue is. begun. The first batch of such 
paper usually banishes the coin from the currency. 
There is no way to entice it back except to call in and 
burn up the paper. Revolutionary governments are 
not generally in position to be able to do this. Ordi- 



ON MONEY. 275 

nary national expedients are denied them. They can- 
not borrow. Therefore they have recourse to credit- 
money, which is really borrowing without interest, 
and when once the press is set at work it must work 
on with livelier speed, because just in the ratio of 
the depreciation is a greater amount required to 
meet the ordinary payments. This example is sig- 
nificant, because it shows the powerlessness of even 
the strongest and most unscrupulous governments 
to regulate the value of anything. The assignats 
were depreciating during the very months in which 
Robespierre and the Comraitte of Public Safety were 
wielding the power of life and death in France with 
terrific energy. They did their utmost to stop the 
sinking of the revolutionary paper. But value knows 
its own laws, and follows them, in spite of decrees 
and penalties. 

The bills of credit issued by the Continental Con- 
gress during the American Revolution had a course 
and issue very similar to those of the French assig- 
nats. Unlike them, these were based simply upon 
the good faith of the people whom the Congress 
represented. Their vice was not, as in the previous 
instances, the supposition that money may be 
founded on the value of specific commodities; but 
their emission ignored this fundamental law of 
finance, namely, that the value of money arises as 
all other value arises, and is amenable to the same 
principle of supply and demand as other values; and 
their vice, consequently, was, that there was no nat- 
ural limitation of their supply. Money is either an 
intermediate and equivalent merchandise, or prom- 
ises to pay it; that is to say, gold or silver, or prom- 



276 ELEMENTS OF POLITICAL ECONOMY. 

ises to pay them ; and mere promises to pay them, 
such as the continental bills were, unaccompanied 
by any provision to pay them, have no natural limi- 
tation of supply. In June, 1775, $2,000,000 were 
emitted; in November, $3,000,000 more; the next 
February, $4,000,000 more ; and in August, $5,000,- 
000 more. The depreciation began before the next 
issue of $5,000,000, May, 1777. But the bills kept 
up to par for more than a year. As the emissions mul- 
tiplied, the depreciation became rapid. In August, 
1777, they exchanged with silver at 3 for 1 ; in Feb- 
ruary, 1779, at 10 for 1 ; and in November, 1779, the 
date of the last emission, at about 40 for 1. Early 
the next year they dropped out of circulation alto- 
gether. Thus their course was run in less than five 
years. The Congress pledged itself not to emit over 
$200,000,000 in all ; but I suspect that that limit, as 
is usual in such cases, was considerably overpassed, 
either by design or fraud. Jefferson estimates that 
the nation realized from the $200,000,000, $36,367,- 
720 in specie value.i Most of these bills were never 
redeemed. 

The United States legal-tender notes which began 
to be issued in April, 1862, and of which $450,000,000 
were put into circulation, are in their nature like the 
continental bills, and have been more or less depre- 
ciated from the first, and at times very much depre- 
ciated. It may be questioned whether the making 
these notes a legal tender has appreciated their value 
at all ; so far as the demand for them to pay debts 
with has been thereby increased it has had such a 
tendency, but so far as it indicated a lack of confi- 

1 Jefferson's Works, vol. ix., page 259. 



ON MONEY. 277 

dence on the part of the government in the validity 
of its ovt'n promises the tendency has been the re- 
verse. The faith of the people in their money is 
very properly more sensitive and more easily shaken 
than their faith in anything else ; and this is one of 
several weighty reasons why the element of credit 
should not enter into the money at all. Credit is 
good in its place, but in the people's current money 
it is out of place. Hence these notes, notwithstand- 
ing their legal-tender character, have been much 
more depreciated than any form of the national 
bonds. I cannot think that good financiering would 
have found it necessary to issue such paper; and I 
am quite sure that making it legal-tender has not on 
the whole enhanced its value. In the Eastern and 
Middle States, the legal-tenders had no more accept- 
ance at first than the bills of their State banks, which 
were equally irredeemable. 

Between the years 1782 and 1865, there circulated 
in the United States a paper money consisting of 
bills issued by banks established under the authority 
of the individual States. These bills were nomi- 
nally convertible into coin at the will of the holders. 
Some of the States required their banks to keep a 
percentage of specie on hand for the redemption of 
their bills ; but most of them required only a deposit 
of some kind of securities with an officer of the 
State, on the strength of which securities the banks 
were allowed to issue an equivalent value in bills ; 
and some of the States did not even require so much 
as this. The fallacy of founding a paper money 
upon public securities, will be fully exposed in the 
following paragraphs; it is here only necessary to 



278 ELEMENTS OF POLITICAL ECONOMY. 

observe that our proposition, if correct, condemns 
the money of these State banks. Some of it was 
better than the rest, but none of it deserved the 
praise of being a satisfactory money. (1.) It was 
liable to great and sudden contractions and expan- 
sions in volume. For instance, the volume in 1858 
was $59,570,474 less than in 1857; and in 1863 
$54,885,139 more than in 1862. (2.) The ratio of 
paper to the specie reserved to redeem it was a high 
ratio. The average for the whole country in Jan- 
uary, 1863, was 4 to 1 ; in Rhode Island more than 
12 to 1 ; and in Vermont more than 28 to 1.^ Such 
a paper can only be called redeemable by stretch of 
courtesy. (3.) As a matter of fact, so soon as there 
began to be a financial pressure, especially when- 
ever the exigencies of commerce withdrew gold for 
foreign trade from reserves already so small, the 
banks were compelled to confess, what everybody 
knew before, that they were unable to redeem their 
promises. Four or five times, during the continu- 
ance of the system, panics attacked the paper money, 
and the banks suspended specie payments. In these 
times of stress some of the banks did better than 
others ; the Bank of the State of Indiana, for exam- 
ple, under the management of the present Secretary 
of the Treasury, maintained specie payments in the 
trying periods of 1857 and 1861.2 (4.) The instabil- 
ity of the general system tended towards a reckless 
way of doing business, and led on to frequent bank- 
ruptcies, which became a just reproach to us in for- 
eign countries. The banks contributed powerfully 

1 Finance Report, 1863. 

2 Letter of Mr. McCiilloch, August 17, 1867. 



ON MONEY. 279 

in times of quiet by a system of generous loaning, 
on which their profits depended, to induce a spirit 
of speculation and a willingness to contract debts, 
and experienced when the reaction came, how much 
easier it is to loan paper promises than to fulfill them. 
Their inability to continue in troublous times the 
free loans which helped to bring them on, and their 
repeated failures to make good the obligation to re- 
deem their own notes, caused incalculable losses of 
property. There can be no hesitation in affirming 
that the expense of maintaining a gold and silver 
money for all the wants of the whole country, might 
have been met many times over from the losses 
resulting from this bank-paper system. It is fortu- 
nate that the people concluded to abandon it. 

We come now to the money of the present na- 
tional banks organized under the law of February, 
1863. This money is likely to be better than that 
last considered, because the banks issuing it are 
amenable to a central authority and to common reg- 
ulations. They deposit with the national Comptrol- 
ler of the Currency gold-bearing government bonds 
to an amount somewhat greater than that of the 
circulating notes which they receive back from him, 
SO' that the redemption of the notes may be provided 
for by the sale of the bonds, in case the banks do 
not redeem the notes. The banks are also required 
to hold in reserve a certain percentage of lawful 
money of the United States. The notes are so ex- 
pensively engraved by the national government that 
the counterfeiting of them has proved to be very 
difiicult. The total amount of notes authorized at 
present to be issued by all the banks is $300,000,000. 



280 ELEMENTS OF POLITICAL ECONOMY. 

It might seem as if this form of money would meet 
our test; nevertheless, there is a vicious principle 
that underlies the foundation of the present system. 
It is just as bad in principle to base a paper money 
upon government debt, as upon lands, or other com- 
modities. The evidences of government debt are 
usually salable in the market at some price, and so 
are lands, mercantile bills, and all the articles of a 
prices current. Perhaps the government debt is more 
uniformly salable than any of them ; but there is no 
relation of a proper amount of money for any coun- 
try to the amount of its national debt, any more than 
to the value of its lands. The absurdity of the prin- 
ciple is only disguised by an arbitrary limitation of it. 
If it is proper to base $300,000,000 of paper money 
on $333,333,333 of government bonds, why is it not 
proper to base $300,000,000 more of paper money on 
$333,333,333 more of the government bonds, and 
so on,' till the amount of money shall approximate 
the amount of the debt ? Any limit placed is purely 
artificial. One Congress may think that $300,000,000 
of paper money is enough, another that $600,000,000 
will not be too much, and the third enact a free 
banking law, by which all the debt may become a 
basis for paper money to rest on. The primary 
function of money, it must be repeated, is to serve 
as a medium of ^^change ; and the quantity of such 
a medium required to facilitate the exchanges in any 
country is impossible to be determined by law. The 
only safety, under our present system, is to make the 
amount of paper decidedly less than what is known 
to be the necessary amount of the whole circulating 
medium, and then allow coin money to fill up the 



ON MONEY. 281 

deficiency in- accordance with its own laws. If we 
could be assured that the $300,000,000 of this money 
already authorized would not be increased, then a 
good degree of confidence in it would be natural and 
reasonable; then about a half of our whole currency 
would be gold and silver; the paper, like the bills of 
the Bank of England, would undoubtedly be at par 
all the while, and we should gain something by the 
superior convenience of the paper, and not lose much 
by its inferior steadiness. But the mischief of it is, • 
this money cannot regulate its own quantity; it is 
not guarded, as gold and silver are, by a natural lim- 
itation of supply; a simple vote of Congress would 
be sufficient to double or treble its quantity, and thus 
derange its value, and postpone indefinitely its par 
with gold. After all that can be said in favor of it, 
it is credit-money still, and exposed to the dangers 
inseparable from credit-money, namely, the distrust 
of the people, the undue enlargement and sudden 
diminution of its volume, a consequent unsteadiness 
of value, and inconvertibility. If we are to have a 
national paper currency expanding and contracting 
under the successive tinkerings of Congress, we shall 
yet experience more of those evils of -credit-money, 
from which we have suffered in the past so exten- 
sively in property and reputation, and which nothing 
but our exuberant and exulting strength has enabled 
us to outlive and to forget. 

Our last example of credit-money shall be the bills 
of the Bank of England. This is an association of 
individuals incorporated under the style of the " Gov- 
ernor and Company of the Bank of England." The 
bank was a child of the English Revolution, and 



282 ELEMENTS OF POLITICAL ECONOMY. 

was incorporated by Parliament in 1694, on condi- 
tion that its stockholders should loan to government, 
then pressed for funds, the sum of £1,200,000, on 
which they were promised eight per cent, as interest, 
and <£4,000 for management, per annum. On the 
strength of this capital stock, which was simply so 
much of government debt, the bank was authorized 
to issue bills to an equivalent amount, but which at 
first could only pass from hand to hand by succes- 
sive indorsements. The first charter was terminable 
at the pleasure of the goverrrment any time after 
August 1st, 1705, by giving a year's notice to the 
bank, and by paying the debt due to it. The bills 
at first were paid promptly in coin on demand ; the 
bank became the means of increasing the credit at 
home and the strength abroad of the revolutionary 
government of William and Mary; and conse- 
quently the Whigs were the friends, and the Jaco- 
bites the foes, of the bank. The government was 
strengthened in a sense by its own indebtedness ; 
for it was felt that if James II. should regain the 
throne, no pound of the loan would ever be paid 
back. " So blosely," says Macaulay, " was the inter- 
est of the bank bound up with the interest of the 
government, that the greater the public danger the 
more ready was the bank to come to the rescue." 
As already related under the last general proposition, 
the silver coins of the realm were at this time much 
worn and clipped; the bank had received them at 
their nominal value ; but after the recoinage began 
in 1698, it was obliged to redeem its bills in new 
coin of full weight, that is, for perhaps 7 ounces of 



ON MONEY. 283 

silver received, it was now bound to pay 12.^ Con- 
sequently its enemies made a run upon the bank by 
collecting its notes to a large amount and presenting 
them for redemption. The bank was obliged to sus- 
pend specie payments, at first partially, and then 
generally. In February, 1697, its notes were 24 per 
cent, below par. A new charter, granted just at this 
time, extended the term, and doubled the capital 
stock of the bank, one fifth of the subscriptions to 
which increase was receivable in bank notes. This 
brought up the notes to par, and made the indebted- 
ness of government to bank <£2,201,171. This sec- 
ond charter practically gave the monopoly of banking 
in England to the Bank of England, and provided 
that if the bank did not redeem its notes, they might 
be presented at the Exchequer and redeemed out of 
the annuity due to the bank. In 1709 the term was 
again extended, the capital stock again doubled, and 
the interest on the whole debt reduced from eight to 
six per cent. Each increase of the debt due from 
the government to the bank carried along with it the 
privilege to the bank of increasing by so much the 
issue of its notes. Here is the vicious principle in 
the Bank of England. It assumes that a paper money 
may he properly based on a government debt. But 
upon how much of that debt ? A limit must be 
placed somewhere ; and the goodness of the money 
will depend after all not on the debt, but upon the 
coin on hand to convert the money. The bills of the 
Bank of England have been and are a tolerable 
money, not so much because there is a part of the 
national debt behind them, as because there is gen- 

1 Macleod's Banking, vol. i., page 357. 



284 ELEMENTS OF POLITICAL ECONOMY. 

erally a plenty of solid cash behind them. In 1716 
the bank was exempted from the operation of all 
usury laws: why the bank only, and not other peo- 
ple as well, the act of Parliament does not state. In 
1720, and again in 1745 when the Young Pretender 
'made the last rally of the Jacobites, there were severe 
runs upon the bank ; on both occasions, in order to 
gain time, notes were paid in slaillings and sixpences. 
Best friends were also accommodated first, who are 
said to have returned the bags of money as fast as 
they received them. The practice of indorsing the 
notes became gradually disused, though the law at 
first did not follow the innovation. In 1759 £15 
and XIO notes began to be issued. Till then there 
were none less than £20. The bank kept advancing 
various sums to government on various conditions, 
mostly however at three per cent., till 1782, when the 
debt stood £11,642,400. When England plunged 
into the war of the French Revolution, the bank 
came under the imperious will of William Pitt. His 
constant demands for money could not be met, and 
the bank at the same time give its usual accommo- 
dation to merchants. Thus the merchants were 
refused. The monopoly now bore its bitter fruit. 
Private credit wavered, and there was a run upon the 
bank for cash. The bank suspended specie pay- 
ments in February, 1797, and did not resume them 
till 1821. Government and the business men of 
London did their best to hold up the credit of the 
notes during the suspension, but they were not made 
a legal tender for debts. Government received them 
at par for taxes, and provided that business pay- 
ments in notes would be held as payments in cash 



ON MONEY. 285 

if offered and accepted as such. Debtors, having 
tendered bank notes, which the creditor refused, had 
certain privileges before the law, which other debtors 
had not. The notes therefore had a quasi legaliza- 
tion, but not a forced circulation. The bank was 
also authorized at this time to issue £5, <£2, and XI 
notes. Cautiously issued at first, bank paper con- 
tinued at par for several years after the suspension, 
which proves that when government possesses the 
monopoly of issuing paper money, and carefully 
limits its quantity, and both receives and pays it out 
at par, it may keep an inconvertible paper at par, or 
even by sufficiently limiting its quantity carry it 
above par. But this truth does not make an incon- 
vertible paper a good money, because it does not 
make it a self-regulating money, and because gov- 
ernment is not wise and firm enough to fix and 
maintain a proper limit. Though Parliament in- 
tended in successive acts to confirm to the Bank of 
England the monopoly of banking by enacting that 
no partnership of more than six persons should take 
up money on its own bills, yet the common law 
assured to private persons and smaller partnerships 
the right to do this ; and private bankers multiplied 
after the suspension, since they were allowed to pay 
their notes in Bank of England notes. Thus the 
quantity of paper money gradually increased till in 
August, 1813, the Bank of England notes were at 
thirty per cent, discount in gold. In the following 
years, large numbers of country bankers failed, and 
their notes were reduced to one half what they had 
been, and Bank of England paper rose almost to par, 
and a partial resumption of specie payments took 



286 ELEMENTS OF POLITICAL ECONOMY. 

place in 1816. In accordance with the principles of 
the celebrated Bullion Report of 1810, which demon- 
strated that the market price of gold (in paper) and 
the state of the foreign exchanges were the infallible 
indices of the value of a paper money, Parliament, 
in 1819, passed an act requiring full resumption of 
specie payments at the bank in 1823. The resump- 
tion actually took place in May, 1821. In 1829, all 
notes whatsoever for less than £5 were forbidden to 
be circulated in England. When the bank charter 
was renewed for the ninth time in 1833, the bills of 
the Bank of England were declared to be a legal 
tender for debts, so long- as the bank paid them on de- 
mand ill legal coin ; and the same act legalized the 
issue of paper money by other banks (no matter 
how many partners) outside of a radius of sixty-five 
miles from London, and also legalized banks within 
the radius, but they could not issue paper money; 
From 1694 to 1711, the issues of the bank were 
limited by law to the amount of the debt owed to it 
by the nation ; from 1711 to 1844 there was no lim- 
itation on the issues, only the bank was required (the^ 
suspension excepted) to pay its notes in coin on de- 
mand; but in 1844, Sir Robert Peel gave the bank 
through Parliament a new constitution, under which 
it is still managed, and which restricts its issues to 
.£15,000,000 on the basis of securities, of which 
something over ,£11,000,000 consists of the govern- 
ment debt, and for all issues beyond this amount it 
must have pound for pound of gold and silver in its 
coffers. The average amount of notes in circulation 
is about £30,000,000, one half based on specie in 
reserve and one half on securities. The bank is also 



ON VALUE. 287 

obliged to buy, and pay for in notes, all gold bullion 
and foreign coins offered to it, at the rate of £3 17s. 
9d. per ounce standard fine; so that, if notes depre- 
ciate as compared with coin, they can be at once 
changed into coin, or bullion and coin can be changed 
into notes if the latter are preferred. The issue de- 
partment of the bank is made quite distinct from 
the loaning department, which latter, receiving its 
notes only from the issue department, raises and 
lowers its rate of discount according to the state of 
the market, but usually keeps its rate a trifle higher 
than the market rate, so as to be able to act as a 
support to private bankers and others in case of 
pressure. For many years the bank has conducted 
its business upon the sound principle of raising its 
rate of discount whenever the foreign exchanges be- 
come adverse and there is a consequent call for gold 
for .exportation, and also whenever the rate of dis- 
count in the neighboring commercial countries is a 
good deal higher than its own. The due proportion 
of the paper money to the specie in reserve is main- 
tained through a proper regulation of the rate of 
discount. The regulating act of 1844 restricted the 
issue department, but it did not restrict the loaning 
department. Gold can be drawn from the bank not 
simply by the presentation of notes, but also by the 
checks of depositors, that is, by those who have sold 
bills of exchange to the bank. Hence the converti- 
bility of the notes can be kept up only by careful 
regulation of the rate of discount. Thrice since 
1844 the government has authorized the bank to vio- 
late its charter, and to issue more notes than that 
allows on securities temporarily; in 1847, in 1857, 



288 ELEMENTS OF POLITICAL ECONOMY. 

and again in 1866. The propriety of this restric- 
tion has been, and is still, vehemently debated in 
England ; and it is an open question also whether 
England is any richer for the use of Bank of Eng- 
land bills. It shows that there is something facti- 
tious and unnatural about paper money, when so 
rigid a system of restraint is considered needful to 
prevent disastrous fluctuations in volume and value. 

In my judgment, the most economical, and, taking 
all things into consideration, every way the best 
money, is the gold and silver which God has evi- 
dently designed for that purpose. This position does 
not exclude the freest use of those convenient econ- 
omizing commercial expedients, such as bills of 
exchange, drafts, checks, money-orders through the 
post-office, and so on, which are sufficient to prevent 
for the most part Etll burdensome transfers of coin. 
The public has not yet reflected sufficiently on the 
peculiar functions of money, nor discriminated as it 
should the proper sphere of credit from the proper 
sphere of currency. Let the currency stand securely 
in its own right as value-money, and then the va- 
rious forms of paper credit will safely come in to 
remove all the inconveniences and secure all the 
advantages of a perfectly sound, and everywhere 
acceptable, and a naturally s( If-regulating money. 

6. Government ought to leave freely to the parties 
concerned the rate of interest to be paid on money 
loaned. 

The law of Moses forbade to the Israelites the 
taking from one ailother any interest on money 
loaned, but at the same time it allowed them to 
take such interest freely of strangers; the permis- 



ON MONEY. 289 

sion in the one case going to show that there is 
nothing in the taking of interest in itself unjust or 
sinful, and the prohibition in the other being readily 
explainable from the general purpose of the munici- 
pal regulations of Moses, which was to found an agri- 
cultural and not a trading commonwealth, in which 
every family was to possess land that could not be 
permanently alienated or sold, in which it was a 
great object to maintain the personal independence 
and equality of these families, in which the law for 
the recovery of debts was very summary and effect- 
ive, lessening the risk of losing the principal, and 
which was to be and was sedulously separated in 
its usages from the surrounding nations. It has 
been well understood for a long time that the mu- 
nicipal code of Moses was local and peculiar, not 
necessarily applicable at all to the circumstances of 
other States, and in no sense binding on the con- 
science of legislators ; and yet there doubtless sprung 
from the prohibition referred to a prejudice against 
interest, and this prejudice was perhaps deepened 
in the Middle Ages and onwards by the conduct of 
the Jews themselves, who, in addition to their sin 
of persistently growing rich in spite of the endless 
disabilities laid on them by tlTe people of Europe, 
always demanded, in accordance with the permis- 
sion of their great lawgiver, a per cent, of interest 
from those strangers to whom they became money- 
lenders. The Jews were everywhere hated, and con- 
sequently the usury which they practised was hated 
also. The fundamental absurdity of forbidding in 
trading communities the taking of interest oh sums 
loaned to a borrower which he was at liberty to use 

19 



290 ELEMENTS OF POLITICAL ECONOMY. 

for his own profit, deterred the nations from going 
to the length of prohibition, unless it might be ir. 
the case of the hated Jews. There is a clause of 
Magna Charta, interesting as showing how early the 
children of Abraham became the money-lenders of 
Europe, to the effect that, during the minority of 
any baron, while his lands are in wardship, no debt 
which he owes to the Jews shall bear any interest. 
The prejudice against interest embodied itself in 
what are called usury laws. These, without pro- 
hibiting the taking of interest, prescribe a maximum 
rate per cent, which lenders may receive, and an- 
nounce a penalty in case they take more. The pen- 
alty is sometimes the forfeiture of the entire interest, 
and sometimes of the entire debt. 

Usury laws, however, have not sprung wholly from 
the old prejudice that to take interest was a great 
moral wrong, and the greater the more was taken ; 
they sprung also from a false notion which used to 
be pretty general, but which is now at length thor- 
oughly exploded, that governments were competent 
to determine the value of their own money; and 
there has been, and is still, a curious and harmful 
confusion in respect to this term, the value of money. 
In the only proper sense of the term, the value of 
money means its power of purchasing services in 
general, and the value of money is high when a 
given sum of it will purchase much of general ser- 
vices, and low in the contrary case ; but, unfortu- 
nately, the terms " high and low value of money " 
have also been used to denote a high or low rate 
of interest on money loaned, which is a very differ- 
ent signification, and a high or low rate of interest 



ON MONEY. 291 

depend on a very distinct set of causes from those 
wliich determine a high or low value of money ; 
nevertheless, so long as governments supposed that 
they could regulate the latter, it is perfectly natural 
that they should also suppose that they could regu- 
late the former ; and although all intelligent govern- 
ments have given over the idea of being able to 
regulate the value of money, many of them still 
adhere to the idea, equally false as the other, that 
they are able to regulate the loanable value, or the 
rate of interest, at least to prevent any more than 
their prescribed maximum rate from being taken. 
Are such laws needful ? Are they beneficial ? Are 
they in accordance with sound principles, or do they 
violate them ? Has a government any right, after it 
has stamped or engraved its money, and parted with 
it to the people in return for value received, to say 
that they into whose hands it has rightfully come 
shall only have so much under any circumstances as 
a reward for foregoing the use of it themselves that 
somebody else may have the use of it? 

Let us see precisely the nature of the transaction 
when one man loans money to another. It is a clear 
case of value. The lender does a service to the 
borrower, and for this service justly demands a com- 
pensation. The service is this : The lender might 
himself use the money to gratify his own desires. It 
is his money; he may use it, as he pleases, for his 
own gratification. Or, he may himself employ it 
productively, and, at the end of the period, receive 
back his principal with the customary rate of profit. 
If he surrenders this advantage to the borrower, if 
he passes over to him the right to use this money, 



292 ELEMENTS OF POLITICAL ECONOMY. 

say, for a year, he practices what we call in Political 
Economy abstinence. For this abstinence tie has a 
right to claim a reward, precisely as the man has a 
right to claim a reward who foregoes working for 
himself in order to work for me. This reward of 
abstinence is interest. The money-lender foregoes 
an advantage. He performs a service for the bor- 
rower; and, therefore, the right to interest stands on 
just as unassailable ground as the right to wages. 

The loanable value of money varies under exactly 
the same conditions as every other value varies. It 
is determined, as every other value is, by the actual 
exchanges between lenders and borrowers; or, rather, 
by what would be the actual exchanges, if they were 
left free. Now for any government to compel a bor- 
rower to pay six per cent, when he might otherwise 
borrow for five, or a lender to take only seven per 
cent, when his money is worth eight, is a direct vio- 
lation of the rights of property. It is a forcible and 
pernicious interference with the freedom of contracts. 
It is based on the false premise that the loanable 
value of money is uniform, and that government is 
competent to determine what it is. No value is 
uniform. And no government is less to be trusted 
with such a power than one which thinks itself 
competent to exercise it. 

On principle, then, these are the two considera- 
tions which condemn usury laws. First, it is invidi- 
ous to allow other men, in every department of busi- 
ness, to exchange their services on the best terms 
they can make, without any interference or control, 
and then, without rendering any solid reason for it, 
to deny this privilege to money-lenders, who offer 



ON MONEY. 293 

just as honorable and useful services to society as 
any other class of men. Second, it is a false notion 
altogether, that the loanable value of money is, or 
can be made, uniform; and, therefore, a rate per 
cent, fixed by the government constantly infringes 
on the rights of property, — on the rights of the bor- 
rowers, if the rate is too high, on the rights of the 
lender, if the rate is too low. But there are two 
other considerations, each, if possible, better than 
these, which condemn all legal rates of interest. 
The first is, that such laws are rarely obeyed, and 
can scarcely be enforced. Common sense is outraged 
by a law which requires a man to part with his 
property at less than the actual value ; and when 
common sense is against a law, it stands a slim 
chance of observance. If the legal fate be six, and 
the actual worth be eight, who lends at six ? Not 
the banks. They require deposits of their custom- 
ers, the use of whose money shall make up to them 
the difference between the legal and the actual rate. 
The modes of evasion are various, but they are ade- 
quate. 

But usury laws, if they were not disregarded, 
would be even worse in their tendency than they are 
now. They aim, I suppose, to aid borrowers, and 
make it easier for them to contract loans. But are 
borrowers, as a class, any more deserving of the fos- 
tering care of government than are lenders ? Even 
if it could make its interference effective, as it can 
not, is there any reason why government, leaving 
these borrowers to make all other bargains, sales, 
and transfers according to their best skill and judg- 
ment, should rush to their rescue only when they 



294 ELEMENTS OF POLITICAL ECONOMY. 

propose to borrow money ? If they are competent 
to do their other business for themselves, govern- 
ment pays their capacity a poor compliment in 
undertaking to help them in the single matter of 
making loans ; and the borrowers in turn have rea- 
son to pray to be delivered from their friends, since 
they, of all others, would be the men especially in- 
jured, if all the lenders obeyed the usury laws. Sup- 
pose that a borrower is in great need of a loan, and* 
that for some reason his credit is now a little weak. 
Many men would be willing to loan him at nine per 
cent., which affords a margin for the extra risk, 
but at seven, which we will suppose the maximum 
allowed by the law, he cannot borrow a dollar, be- 
cause his credit is not quite equal to the best. If, 
therefore, the lenders obey the law, he, and such as 
he, must fail. And because it is unlawful to take 
over seven per cent., he will be obliged to pay those 
who are willing to violate the law ten or twelve, to 
compensate them for the risk and odium of such 
violation, while, under freedom, he could borrow at 
nine. Moreover, if the loanable value of money at 
the time be actually nine, while the law only allows 
seven, many men will attempt to use their own cap- 
ital productively, who would otherwise loan it, in 
order to realize the high rate ; and this action of 
theirs still further restricts the loan-market and 
makes it more difficult to borrow. If, then, the 
purpose of government be to aid borrowers, no 
means could be more unskilfully chosen for that 
end than to pass usury laws, since such laws, so 
far as they are obeyed, have necessarily the oppo- 
site tendency ; and even when violated redound to 



ON MONET. 295 

the disadvantage of borrowers, so long as the laws 
themselves are popularly regarded as of any legal or 
moral force. 

Governments have shown a noteworthy inconsis- 
tency in this matter, which incidentally proves the 
unsoundness of their whole action. While announc- 
ing pains and penalties to those who take or pay 
more than a given rate, they are careful never to 
bind themselves down to any given rate. Govern- 
ments are always more or less borrowers, and if 
usury laws are necessary in order to help borrowers 
in a pinch, there ought to be a clause in the organic 
law of every country, forbidding the government to 
pay and its lenders to take any more than a certain 
rate per cent. There is no such clause in any 
organic law. Governments wisely follow the nat- 
ural market, and borrow low when they can, and 
pay high when they must. In the last months of. 
Mr. Buchanan's administration, the United States 
paid twelve per cent, on a public loan, and could get 
but little at that. Sauce for the goose is sauce for 
the gander, and if usury laws are good for the citi- 
zens, some solid reason ought to be rendered why 
they are not good for the government. The truth is, 
they are not good for either, since natural laws are 
perfectly competent to regulate the rate of interest, 
and do regulate it substantially in spite of a facti- 
tious, impertinent, and mischief-making interference. 
The rate of interest has little to do with the value of 
money, properly so called. It depends on the propor- 
tion between the sums of money ready to be loaned 
in any market, and the amount wanted at that 
time by good borrowers in that market. Every rise 



296 ELEMENTS OF POLITICAL ECONOMY. 

in the rate tends to lessen the demand of borrowers, 
and every fall to enhance that demand, and thus 
every rise and fall of interest tends to check itself, 
and while the daily and monthly variations of the 
rate for first-class borrowers are very considerable, 
the general average of the rate by years, especially 
in Engjand, where usury laws are mostly or wholly 
swept away, is remarkably uniform. 

In 1867, the State of Massachusetts repealed all 
its usury laws, though six per cent, is to be understood 
in the absence of special agreement, and the result 
has been entirely satisfactory to all classes of the 
people. Rhode Island had done this previously, and 
has experienced equal satisfaction in the result. 
Other States will soon follow in their lead; and this 
relic of ignorance and prejudice will pass away. 
Adam Smith left the " Wealth of Nations " disfig- 
ured by the concession that governments might prop- 
erly enough pass usury laws; but it is gratifying to 
be able to add, that he was convinced of his error in 
that by Bentham's book on usury, and fully ac- 
knowledged his conviction in the spirit of a genuine 
lover of truth. We conclude, then, that u&ury laws 
are needless, since interest, like all other prices, wall 
perfectly adjust itself. They are disregarded, since 
lenders will loan or withhold their money according 
to their own keen sense of interest. They are per- 
nicious, since they infringe the rights of property, 
and tend to prevent weak borrowers from having a 
fair chance in the market. 



ON CURRENCY IN THE UNITED STATES. 297 



CHAPTER XL 

ON CURRENCY IN THE UNITED STATES. 

I venture to offer to guide my readers in an attempt 
to trace the steps, State and national, as well the 
earlier as the more recent, which have been made in 
this country to find the way to a healthy, safe, and 
uniform currency. Paper money of almost every 
conceivable variety has been tried at one time and 
another; and the national government for itself, 
between 1836 and 1862, discarded in its own trans- 
actions every kind of paper, both paying out and 
demanding to receive gold and silver money only, 
minting indeed at a small seignorage for all parties 
and in all quantities gold and silver that was brought 
to it, but otherwise leaving the States and the people 
to fabricate and circulate whatever kinds of money 
they might choose. 

From the first establishment of the English colo- 
nies in America, the matter of a suitable exchange- 
medium attracted public attention, and was found to 
be attended with difficulties. The colonists drew all 
their supplies from the mother country, and for a 
long time had but few native products to export in 
return, and consequently there was a constant ten- 
dency in the coin which reached them to flow off 
again to England in payment of these debts. But 



298 ELEMENTS OF POLITICAL ECONOMY. 

something must be used for the purposes of domestic 
exchange. Tobacco in the southern colonies, and 
corn and wheat in the northern, were employed for a 
long time as a local and legalized currency. 

In 1690 Massachusetts set the first example, which 
was soon imitated all over the country, of issuing 
bills of credit, a government paper made receivable in 
taxes, and afterwards made legal tender in payment of 
ordinary debts. At first these bills, or treasury-notes, 
were issued, not to furnish a currency, but merely as 
a convenient way of anticipating the taxes, that is, 
to realize them at the beginning of the year, while 
they would be gradually paid in in the course of the 
year. They were like the English exchequer-bills 
except that they bore no interest. Afterwards, a 
scheme originating in South Carolina came into 
general favor, namely, to open loan-offices for the 
issue of colony-bills, which should furnish at once 
capital for borrowers, and a currency for the people, 
and the interest was to be a source of revenue to the 
colony. 

But in whatever way issued, whether in the way 
of loan to borrowers, or in anticipation of the taxes, 
the essential and inherent vice of such irredeemable 
paper was soon everywhere apparent. There was a 
constant tendency to over-issue, and consequently a 
necessary depreciation. There never was a govern- 
ment yet, of all those which have attempted the issue 
of inconvertible paper, which had prudence and firm- 
ness enough to resist for any great length of time the 
temptation to issue such paper in excess. It always 
has depreciated from that cause, and it probably 
always will. So it was, at any rate, in these colonies 



ON CURRENCY IN THE UNITED STATES. 299 

thus early in our history. The bills of credit were 
issued profusely, and depreciated indefinitely. In 
1749 Massachusetts had found paper money so 
utterly wanting as a measure of value, that she deter- 
mined to abandon it altogether. She redeemed ali 
her outstanding bills in cash at the current rate at 
which they were then exchanging. 

The demands of the old French war, and the va- 
rious attempts to conquer Canada, led, on the part of 
all the colonies except Massachusetts, to new and 
large issues of bills of credit, which depreciated of 
course. Soon after the conquest of Canada the 
British Parliament passed an act prohibiting to all 
the colonies the issue of bills of credit; but from this 
restraint the Revolution set them free ; and, to pro- 
vide means for the desperate struggle with the mother- 
country, there was no resource but in paper money. 

In April, 1775, Massachusetts, which had disused 
paper money for more than a quarter of a century 
revived its use by authorizing the issue of colonial 
bills to the amount of ,£100,000, in sums small 
enough to circulate as a currency ; and on the 23d 
of June following the Continental Congress began 
its fiscal operations by voting to emit two millions 
of dollars in continental bills of credit. Fourteen 
months had elapsed, and fourteen millions of conti- 
nental paper had been authorized, besides large local 
issues,, especially in New England, before its depre- 
ciation excited any very considerable alarm. It soon, 
however, became evident that the only way to stop 
the depreciation would be to stop the issues ; and 
Congress made very persistent but ineffectual at- 
tempts to substitute for further issues a system of 



300 ELEMENTS OF POLITICAL ECONOMY. 

loans on paper bearing interest. At the same time 
they sought to sustain their failing credit by a reso- 
lution that their bills " ought to pass current in all 
payments, trade, and dealings, and be deemed equal 
in value to the same nominal sums in Spanish dol- 
lars " ; and that all persons refusing to take them 
ought to be considered " enemies of the United 
States," upon whom it was recommended to the 
local authorities to inflict " forfeitures and other pen- 
alties." The States were also advised to make these 
bills a legal tender, to make provision for the redemp- 
tion of the first six millions, to avoid the further 
emission of their own local bills, and to take meas- 
ures to draw in those already out.^ The loan sys- 
tem failing. Congress reluctantly had recourse to the 
press which printed the paper money, and the next 
ten millions increased the depreciation decidedly. 
The paper was still lawful tender in payment of 
debts ; and notwithstanding the confusion of con- 
tracts, the universal high prices, the sufferings of the 
poor, and the gains of the artful and unscrupulous, 
Congress felt obliged to give currency to the most 
wretched sophistries, to refer the existing deprecia- 
tion mainly to "want of confidence," and to laud 
the paper as the only kind of money " which cannot 
make to itself wings and fly away ! It remains with 
us, it will not forsake us, it is always ready at hand 
for the purposes of commerce, and every industrious 
man can find it!" The rest of the story is soon 
told. Before the end of the year 1779, the remain- 
der, of the two hundred millions, which, in the vain 
hopes of stopping the depreciation. Congress had 
1 Hildreth's United States, chap. 35. 



ON CURRENCY IN THE UNITED STATES. 301 

beforehand announced as the limit of the issues, 
was put out, and the press was allowed to rest. The 
valufe of the money was then about 'S8j for one. 
The States were now advised to repeal all laws mak- 
ing the bills a legal-tender, and the scheme of the 
" new tenor " was devised, by which the old bills were 
to be drawn in at the rate of forty for one, and funded 
in government bonds bearing interest. This was the 
finishing blow, and the paper soon dropped out of 
circulation altogether. Just before the Revolutionary 
army in camp at Newburgh had combined to refuse 
it, and its circulation was wholly stopped, it ex- 
changed for cash at the rate of one thousand for one. 
One thousand for one is 99j^o^ per cent, below par, and 
the prices of commodities were as ridiculously high 
as the value of the paper was pitifully low. A man 
in New England or New York would pay five hun- 
dred dollars for his dinner, and never ask the landlord 
to reduce the bill. I heard the story in my childhood 
of a certain gentleman well known in those parts, 
who stuffed his sulky-box with continental bills and 
then sallied forth to purchase a cow! 

At this juncture the rudiments of a better system 
appeared. For nearly a hundred years the Bank of 
England had been issuing paper payable on demand 
in gold and silver. Alexander Hamilton had been 
a close student of English history and of English 
finance, and he conceived that the same thing might 
be done with advantage in America. In 1780, when 
he was only twenty-three years old, he wrote a letter 
to Robert Morris, a wealthy and influential member 
of the Continental Congress, and afterwards the 
Continental financier, in which, after showing the 



302 ELEMENTS OF POLITICAL ECONOMY. 

causes of the depreciation of the currency, and the 
necessity of a foreign loan, he furnished a matured 
plan of a bank, by means of which the loan might 
be so applied as to reestablish the public credit and 
become the basis of a redeemable currency. This 
was, as I believe, the first suggestion of a banking 
institution for America. Hamilton's idea was briefly 
this : Public credit there was none ; an established 
government there was none ; the Continental Con- 
gress was exercising the unlimited functions of a 
revolutionary government ; under these circumstances 
the only way to create public credit was to unite 
with it the private interests of moneyed men. Es- 
tablish then a bank which shall be the fiscal agent 
of the government; obtain, if possible, a foreign 
loan, and deposit it in cash in the bank ; let half the 
stock of the bank be subscribed by wealthy men, 
who can reasonably look for a fair profit on their 
investment ; let government hold the other half and 
have half the profits ; then let the bank issue bills on 
its cash basis, consisting of the loan, the private sub- 
scriptions, and the product of the Continental taxes 
as they are gradually paid in. Thus the bank, and 
all subscribers to its stock, and all holders of its bills 
would be directly interested to uphold the govern- 
ment and its credit. Community would be equally 
benefited, since it would have a relatively sound 
paper for ordinary commercial purposes. 

Mr. Morris found his duties as Continental finan- 
cier sufficiently embarrassing; and in the fall of 
1781 brought forward a scheme for a national bank, 
partially embodying on a small scale the ideas of 
Hamilton. Congress sanctioned the plan, and the 



ON CURRENCY IN THE UNITED STATES. 303 

Bank of North America, the first bank in this coun- 
try, was established in Philadelphia. Mr. Morris, in 
behalf of the general government, subscribed nearly 
two thirds of the capital stock of ^400,000, and nat- 
urally took the entire control of the institution. The 
reason why individuals subscribed so little is to be 
found in the distrust with which paper money of all 
kinds had come to be regarded. Capitalists did not 
believe there would be any dividends, and the peo- 
ple were afraid the paper would depreciate in their 
hands. Under these unfavorable circumstances the 
bank went into operation in January, 1782. Every 
effort was made to produce a public sentiment favor- 
able to the credit of the bank, and its bills were the* 
first paper handled by Americans which was con- 
vertible into coin at the pleasure of the holders. 
Being made receivable at the Federal and State treas- 
uries in payment of taxes and duties, and being 
cautiously issued at first, the bills soon came into 
such circulation that the bank was able to declare 
dividends on its stock from twelve to sixteen per 
cent, per annum. Who ever heard of capitalists 
who could resist sixteen per cent ? The bank 
opened its books for new subscriptions, and the 
stock went up without difficulty from $400,000 to 
$2,000,000. 

We must here dismiss the Bank of North Amer- 
ica, the parent of all our institutions of the kind, 
with the remark that, although it was chartered by 
the old Congress as a national institution, such 
doubts were entertained of the competency of that 
body to incorporate an institution within a State, 
that a charter was soon after procured from the 



304 ELEMENTS OF POLITICAL ECONOMY. 

legislature of Pennsylvania ; and also, that its con- 
nection with the Continental treasury ceased, on the 
retirement of Mr. Morris from the office of financier. 
It continued, however, as a State bank ; and it flour- 
ishes still in a green old age among the banking con- 
cerns of the Quaker City. 

Till Mr. Morris's Bank of North America com- 
menced operations in January, 1782, all the paper 
that had been issued in the country, whether by the 
colonies as such or by the central authority repre- 
sented at first by the revolutionary government and 
afterwards by the confederation, was irredeemable 
paper, and illustrated the universal financial law 
'that such paper, unless issued under very favorable 
circumstances and strictly limited in quantity, will 
depreciate in spite of everything. The bills of the 
Bank oi North America were convertible into gold 
and silver at the pleasure of the holders, and they 
mark, therefore, an epoch in the monetary history of 
the country. Some silver coins had been issued in 
Massachusetts as early as 1652, and continued to be 
struck at the colonial mint for about thirty years, but 
the pieces all bear the dates of 1652 or 1662 ; and 
these pieces, now known and prized as the " old pine- 
tree coinage," were the only public coins of any de- 
scription minted in the country itself until after the 
close of the Revolutionary war. They were shillings, 
sixpences, threepences, and twopences. Both silver 
and copper coins were, however, minted in England 
for the use of the colonies ; and in 1722 a patent 
was issued by George I. to one William Wood to 
make coins for colonial use out of pinchbeck, in pur- 
suance of which he had the conscience to make thir- 



ON CUERENCY IN THE UNITED STATES. 305 

teen bright shillings, or thereabouts, out of a pound 
of brass. It is refreshing to add that the colonists 
had the sense and spirit utterly to reject Wood's 
money. In 1786 actual coinage of copper coins 
took place under State authority, in Vermont, in 
Connecticut, and in New Jersey. The same year 
witnessed the adoption in the old Congress of Jef- 
ferson's plan for a decimal currency, and the estab- 
lishment of a mint under national authority, and 
three hundred tons of Federal copper cents were con- 
tracted to be struck the following year. 

When the government went into operation under 
the present constitution, in 1789, besides the Bank 
of North America, two others had been established, 
the Bank of New York in New York, and the Bank 
of Massachusetts in Boston. These three were all, 
and their circulation was mostly confined to the 
cities in which they were located. Except the cop- 
per cents just spoken of, there was no such thing as 
a national currency, and the new government had 
not sufficient credit to make it practicable to rely on 
the aid of private lenders. Hamilton was now Sec- 
retary of the Treasury. In pursuance of the duty of 
his office, he presented to Congress in December, 
1790, his celebrated report, recommending the estab- 
lishment of a Bank of the United States. In this 
report, which at once gave Hamilton a European 
reputation, two points were specially argued : first, 
that such an institution would afford through its bills 
great facilities to trade and to domestic exchanges ; 
and, second, would furnish the new government a 
convenient paper medium for its monetary transac- 
tions, and be a resource for temporary loans. The 

20 



306 ELEMENTS OF POLITICAL ECONOMY. 

first point respected the people, the second the gov 
ernment. 

There can be no doubt, I think, that in the circum- 
stances of that time a national bank was expedient 
and beneficial. There was then no confidence, no 
credit, no currency, and no commercial relations es- 
tablished with foreign nations by which gold and 
silver could flow into the country. As an institution 
of loan, the bank gave credit to the extent of its 
means to all who had good security to offer. As an 
institution of circulation, it furnished a convenient, 
a convertible, and a national money. As a govern- 
mental fiscal agent, government could borrow of it 
on an emergency, and pay at its leisure from the 
proceeds of the imposts and taxes. The fullest ac- 
knowledgment, however, of the benefits of such an 
institution at that time does not at all commit one 
to the defence of any such institution now. Cir- 
cumstances have utterly changed. No well-estab- 
lished national government can afford to add to its 
many and higher functions the delicate duty, so 
much more appropriate to private bankers, of loan- 
ing money to the people on interest according to its 
notion of their solvency ; and, in a republic especially, 
where hostile parties alternately administer the gov- 
ernment, loans would be sure to be made for parti- 
san purposes, and corruption find the bank a ready 
tool. 

The constitutionality of Hamilton's plan was 
stoutly denied in Congress. The first-rate abilities 
and growing reputation of that eminent statesman 
had already awakened jealousies both in Congress 
and in the cabinet. Nevertheless, a bill, in substan- 



ON CURRENCY IN THE UNITED STATES. 307 

tial accordance with the views of the Secretary 
passed both houses by large majorities. Washing- 
ton, before signing it, required the written opinion 
of his cabinet on the question of constitutionality. 
Hamilton and Knox took the affirmative ; Jefferson 
and E-andolph the negative ; the President, as often, 
sided with Hamilton, and signed the bill. 

On New Year's day, 1853, I had the great per- 
sonal pleasure of calling on the widow of Alexan- 
der Hamilton, who survived him just fifty years. 
Turning the conversation on her husband's connec- 
tion with the government, the old lady remarked 
with enthusiasm, — " My husband gave you a bank. 
Jefferson thought we ought not to have any bank, 
and Washington rather thought so, too; but my hus- 
band said we must have a bank ; and one day he 
said to me, ' My dear, you must sit up with me to- 
night, and write for me;' and I sat up all night, and 
I wrote it out with my own hand, and the next 
morning he carried it to Washington, and we had a 
bank!" This last was pronounced not without ex- 
ultation. Fortunate old lady ! The daughter of one 
of the purest and most magnanimous of the Revolu- 
tionary patriots. Gen. Philip Schuyler, and the wife 
of another, peerless among the statesmen of his time; 
who herself lived to see the complete success of the 
work to which her father and husband were among 
the chief contributors. 

With a charter that was to run twenty years, with 
a capital stock of $10,000,000, $8,000,000 of which 
was subscribed by individuals, and $2,000,000 by 
the United States, and the whole of which was sub- 
scribed, with a surolus within a few hours the first 



308 ELEMENTS OF POLITICAL ECONOMY. 

United States Bank went into operation at Phila- 
delphia, in July, 1791. Notice this feature of the 
stock. Hamilton had just before persuaded Con- 
gress to assume the State debts incurred in the war 
of the Revolution, and to fund them, together with 
the certificates of the public debt, into one new and 
compact debt. Three fourths of the subscription of 
individuals to the bank stock must be in these new 
government stocks which bore six per cent. The 
demand for them, thus created, brought them in- 
stantly up to par ; so that the bank was made a 
means, incidentally, of establishing the credit of the 
United States, — all its paper was now at par. This 
splendid success of Hamilton's financial schemes, 
together with the unexpected income from the new 
tariff, accounts in part for the immense popularity 
of the man; and justifies the strong expression of 
Daniel Webster, who said, on one occasion, that 
Alexander Hamilton raised the public credit of the 
United States from the dead. 

During twenty years, the term of its charter, the 
operation of the first United States Bank appears 
to have been healthful and beneficent. It furnished 
a paper money secured by government stocks and 
by cash that was current at a uniform value all over 
the country ; its loans, under the circumstances of 
the time, gave a sharp spur to industry and com- 
merce ; while its dividends to stockholders never fell 
below eight, and frequently rose to ten per cent. It 
is not to be wondered at, therefore, that as the time 
approached for the charter to expire, the stockhold- 
ers were anxious for a renewal. They applied for 
such renewal, offering to pay the government a mill- 



ON CURRENCY IN THE UNITED STATES. 309 

ion and a quarter for the privilege of continuance. 
It was alleged against the bank, on the other hand, 
that the stock was now largely owned by foreigners, 
which was true ; and that the directors had some- 
times made, or withheld, loans, for party purposes, 
which was doubtful. The real cause of the opposi- 
tion to the renewal of the charter was this: Instead 
of the three State banks in existence when the na- 
tional institution was chartered, there were now 
(1811) eighty-eight State banks, in some of which 
the States as such held stock. These banks and 
their friends supposed that it would be for their 
interest that the national bank should go out of be- 
ing ; that, in that case, they should obtain the cus- 
tody and management of the national funds, and 
furnish the country the currency, which the national 
instHution had furnished. The charter was defeated, 
in the House by one vote, and in the Senate by the 
casting vote of the Vice-President, George Clinton. 
The bank was obliged to wind up its affairs. It did 
so speedily and honestly. This was in 1811. 

Undoubtedly the paper of the first national bank 
was very fair money, and certainly superior to the 
bills of the new State banks, for the creation of 
which there was a sort of mania in the country so 
soon as it was ascertained that the national institu- 
tion could not be rechartered. Many of these went 
into operation on the strength of little or no bona 
fide capital. They issued their notes freely, and 
the chasm caused by the withdrawal of the national 
circulation w^as soon filled up, and more too. As a 
necessary consequence, the whole circulating me- 
dium became depreciated, and the currency came 



310 ELEMENTS OF POLITICAL ECONOMY. 

into dreadful disorder throughout the country. In 
the fall of 1814, there was a general stoppage of all 
the banks in the United States, except those in New 
England. The notes of the New York city banks 
were ten per cent, below par; those of Philadel- 
phia, eighteen ; of Baltimore, twenty ; of Pittsburg, 
twenty-five. All this illustrates the simple financial 
truth, that mdney is not a commodity of which an 
unlimited quantity can be absorbed by business, but 
is an instrument for a certain specific purpose, — 
namely, to facilitate the exchange of existing com- 
modities and of services all ready to be exchanged, 
and only waiting for the presence of the medium 
to consummate the transfer; and whenever more 
than enough for this purpose is put out, whether it be 
specie or paper, a diminution in value of every part 
of it is inevitable; on the same principles precisely 
as,* when the market is permanently overstocked 
with sewing-machines, there will be an inevitable 
decline in their value. Money is good for the pur- 
pose for which it was invented, and useless for any 
other. 

In this state of things Mr. Dallas, then Secretary 
of the Treasury, recommended to Congress the estab- 
lishment of a new United States Bank, modelled 
after the first, with a charter for twenty years, with a 
capital stock of $35,000,000, the bank to pay the 
government a bonus of a million and a half for the 
privilege of coming into being. It was thought that 
a strong central and national institution, on which 
the State banks, now increased in number to two 
hundred and forty-six, might lean for support, would 
enable them shortly to resume specie payments, and 



ON CUKRENCY IN THE UNITED STATES. 311 

to go on thereafter on better principles. The bill 
organizing the bank was engineered through the 
House by John C. Calhoun. It went into operation 
in 1816, just after the close of the last war with 
England, when the reviving enterprise and enlarged 
business of peace seemed to open up before it a 
prosperous career. 

The new bank was not, however, at first, fortunate 
in its management. It pushed its paper into circu- 
lation with reckless eagerness. In the course of one 
month it increased its discounts from three to twenty- 
millions, and in^ nine months its discount line was 
thirty-three millions. The results were what might 
have been expected, — prices universally high, a spirit 
of speculation everywhere rife, and gold leaving the 
country by shiploads. The bank soon fell into 
difficulties, and public opinion turned more or less 
against it. Although under the abler and more 
careful management, first of Langdon Cheves, and 
then of Nicholas Biddle, the bank recovered its sta- 
bility, it never enjoyed quite the same confidence 
and credit as the first bank. 

This was not wholly its own fault ; for in 1829, 
seven years before its charter was to expire, Andrew 
.Jackson commenced his famous contest with the 
bank, which he kept up w*ithout intermission till the 
charter expired in 1836. Under this presidential and 
consequent congressional fire, the bank can hardly 
be said to have had a fair chance. Andrew Jackson 
had sworn its death by the 'tarnal — his usual oath — 
and Andrew Jackson was not a man to be thwarted. 
In his annual message in 1829, he gave the directors 
fair warning that there would be " constitutional 



312 ELEMENTS OF POLITICAL ECONOMY. 

difficulties " in the way of their securing any exten- 
sion of their privileges, and in 1832 he vetoed the 
bill to recharter the bank. The next step was to 
remove from the custody and management of the 
bank the public moneys. Three years before the 
charter expired he requested Mr. McLane, the Secre- 
tary of the Treasury, to remove the national funds 
from the custody of the bank, and to place them in 
certain selected State banks. Mr. McLane declined 
to order the removal. Whereupon Mr. Duane of 
New York was appointed to the treasury. • But Mr. 
Duane, no more than his predecessor, could see his 
way clear to remove the deposits. When made to 
understand that it was the determination of the 
President to have them removed at all hazards, he 
explicitly refused to lend himself for the purpose. 
The President removed Mr. Duane, and appointed 
Roger B. Taney, the late Chief Justice, as Secretary 
of the Treasury. He proved more flexible to the will 
of power, and immediately gave the required order. 
The consequences of this step in the circumstances 
were immense and mischievous. The discount line 
of the bank was at the moment over $60,000,000. 
The public deposits were $10,000,000. The sudden 
withdrawal of this sum affected credit and disar- 
ranged business to a remarkable degree, and caused 
intense excitement all over the Union. 

The next movement in the " great experiment," as 
it was sarcastically called in the politics of the day, 
was the issue of the famous specie-circular, which 
directed the receivers of the public money to take 
nothing but gold and silver in payment of the public 
lands. Speculators and others had been making 



ON CUKRENCT IN THE UNITED STATES. 313 

large purchases of western lands, expecting to pay 
in paper money. The specie-circular came upon 
them like a clap of thunder. Their consternation 
was vast, and the circular, coming as it did, shortly 
after the removal of the deposits, made confusion 
worse confounded. 

General Jackson went out of office, and the second 
bank went out of being the same year ; but the 
inaugurated movement was completed by Mr. Van 
Buren, who effected the complete divorce of the 
government from all banks and fiscal agents what- 
ever, first, by directing the State banks which now 
had the keeping of the public moneys, to distribute 
them as surplus revenue among the States; and, by 
the sub-treasury scheme, in pursuance of which the 
United States received in payment of all dues, and 
paid out in all disbursements, gold a-iid silver only. 
I believe in gold and silver money, or their equiv- 
alent in representative paper which can be instant- 
ly converted into them, and do not question the 
patriotic aims of the administrations concerned, but 
there was something headlong and violent in this 
transition from the traditional policy of the govern- 
ment to the new system. 

From 1836 to 1862 there was no national money 
in the United States, except the coin ; the paper 
currency was furnished by a number, increased at 
last to over fifteen hundred, of joint-stock banking 
companies, under the sole authority of the States. 
These, under various and often conflicting regula- 
tions, manufactured and issued money for the peo- 
ple. This money, as a whole, was never a safe, a 
uniform, an economical currency. It was subject to 



314 ELEMENTS OF POLITICAL ECONOMY. 

alternate contractions and expansions which spoiled 
it as a measure of value. It was never able to stand 
the shock of the commercial crises which it power- 
fully contributed to bring on. Money is an imple- 
ment, and a costly implement, and the functions it 
has to perform cannot be performed by cheap, penny- 
wise, pound - foolish substitutes. 

Two kinds of paper and two kinds of coin had 
preceded the issue of the bills of the first United 
States Bank. The first kind of paper were bills of 
credit issued first by the individual colonies, and then 
by the confederated continent, always inconvertible, 
and consequently always depreciating; the second 
kind of paper were the bills of the three State banks 
at Philadelphia, New York, and Boston, convertible, 
and so far forth excellent ; but circulating mainly in 
their respective cities only. The first kind of coin 
were the pine-tree silver-pieces of Massachusetts, 
minted two hundred years ago, and the copper pieces 
struck under State authority about the time of the 
adoption of the constitution of the United States, 
simultaneously in Vermont, Connecticut, New Jer- 
sey, and Massachusetts ; the other kind of coin being 
the copper cents nationalized by the old Congress, 
and which came into circulation while the conven- 
tion was sitting which framed the constitution under 
which we live. 

As soon as the new government had got fairly 
under way, the more pressing questions of the tariff, 
the national bank, the organization of the depart- 
ments, being disposed of, the national mint was put 
into practical operation at Philadelphia. The laws 
relating to the mint were enacted during the session 



ON CURRENCY IN THE UNITED STATES. 315 

of 1792, and the first Federal coins of gold and silver 
were struck in January, 1795. It is to Jefferson that 
the country is indebted for the decimal scale of cur- 
rency, so superior in convenience to all other mone- 
tary subdivisions. He had proposed a matured plan 
for the coinage, with the dollar for the unit, and the 
decimal subdivisions of dimes, cents, and mills, and 
the decimal multiple of the dollar, the eagle, while 
he was a member of the old Congress in 1785 ; and 
the Congress had adopted his plan the following 
year, and, as has been said, some copper cents were 
minted on the Federal standard ; but nothing more 
was done till 1792, when the new Congress reaffirmed 
the resolutions of the old, readopted Jefferson's de- 
nominations, and put our existing mint into working 
order. There was a curious debate in Congress at 
the time as to the devices which the coins should 
bear. As the bill came from the Senate, where it 
originated, the gold and silver pieces were to have on 
one side the figure of the eagle, which the Continen- 
tal Congress long before had adopted as the national 
emblem, and near this, the legend " United States 
of America." This was for the obverse of the coin, 
and so far nobody had any objection. For the re- 
verse, the bill proposed that, in accordance with the 
u»jages of all nations from the time of the earliest 
known coinage, the impression or representation of 
the head of the President of the United States for 
the time being, together with his name, order of suc- 
cession in the presidency, and the date of the coin- 
age, should be stamped. This was strongly objected 
to in the House, as savoring of monarchy. The 
President's head on the coin was deemed by some a 



316 ELEMENTS OF POLITICAL ECONOMY. 

dangerous thing for the republic, and the proposal 
led to a sarcastic and even acrinaonious debate, and 
was at length defeated in the House by a vote of 
twenty-six to twenty-two, in which the Senate was 
afterwards obliged to concur, and a proposition made 
by Key of Maryland was carried, to substitute a fig- 
ure of Liberty instead of the obnoxious head of the 
President ; but under precisely what sort of a figure 
to represent Liberty was then the difficulty, and at the 
next session Elias Boudinot of New Jersey, after- 
wards the director of the mint, endeavored to get 
substituted for the emblematic figure of Liberty the- 
head of Columbus, but in vain ; the Republican party 
was bound that the figure of Liberty and no other 
should go on the coins, and it went on, and we have 
here the history of that benignant looking lady, 
whose pretty face we used to see familiarly enough 
before the war, and whose acquaintance we hope to 
resume in the good time coming. 

It may be asked how we came to have the dollar 
as the unit of our monetary system. The word dol- 
lar is derived from a German word which means 
valley, and was first applied to coins in consequence 
of this circumstance : in the raining region of Bohe- 
mia, at a place called Joachirasthal, (Joachim's val- 
ley,) silver-pieces of one ounce weight were coined 
and came into circulation about 1520 as Joachims- 
thaler, and then for shortness thaler ; this became 
dalera in Spanish, and in English dollar. The thaler 
is still the German money of account, and the Span- 
ish milled dollar became so famous in the world of 
commerce, and so familiar to our fathers in their 
dealings with the West Indies and the Spanish 



ON CURRENCY IN THE UNITED STATES. 317 

American colonies, that our Congress adopted it as 
the best known and most convenient unit of money. 
The word dime is a corruption of the Latin decern, 
ten ; cent a contraction of the Latin centum, hun- 
dred ; and mill a contraction of the Latin mille, thou- 
sand ; so that our denominations are philosophical 
as well as convenient, each one in order being and 
being designated a tenth part of the one above. 

The mint of the United States is one of the most 
interesting institutions in the country. It was estab- 
lished at Philadelphia in 1792. While it was still 
doubtful where the ultimate seat of the national gov- 
ernment would be placed, the citizens of that beau- 
tiful city were strongly in hopes of being able to 
persuade Congress permanently to abide in their 
town, in which the old continental body had first 
met, in which independence had been declared, and 
which, more than any other, was popularly regarded 
as the headquarters of the national Union. A no- 
table instance of log-rolling legislation, the first in 
our history, transferred the capital of the country to 
the banks of the Potomac, but the good people of the 
Quaker City have nevertheless always retained the 
mint, as a memorial of their earlier position in the 
history of the government. 

By the law establishing the mint, the chief officer 
was to be styled a director ; and the ingenious David 
Rittenhouse, a self-taught mathematician, who had 
r'tm several years before, by the help of instruments 
all of his own construction, the most difficult part of 
Mason and Dixon's line, was shortly after appointed 
to this post. The act stipulated that all bullion 
brought to the mint should be coined gratuitously ; 



318 ELEMENTS OF POLITICAL ECONOMY. 

but when coin was delivered in exchange for bullion 
on the spot, one half of one per cent, was to be 
charged as seigniorage. The coins were to be the 
eagle, the half-eagle and the quarter-eagle in gold ; 
the dollar, half-dollar, quarter-dollar, dime, and half- 
dime in silver ; the cent and half-cent in copper. 
The weight of the eagle was to be 270 grains troy, 
alloyed according to the English standard, one part 
in tv^'^elve; and the dollar was to weigh 416 grains, 
alloyed one part in nine and nine-tenths. The sub- 
divisions of these coins, gold and silver, were to be 
in ail respects proportional to their units. At that 
time, in France and in Europe generally, the current 
relative value of gold and silver was considered one 
to fifteen, and the act of Congress established that 
as the ratio of the value of the two metals to be 
maintained at the mint; but, from this clause of the 
law, there followed important consequences, which 
were not foreseen, since that was not, at least in 
America, the true ratio of their value at that time, 
and being a decided undervaluation of gold, the gold 
coinage did not come into any circulation. -It was 
really worth by the ounce more than fifteen ounces 
of silver ; but, as the mint only reckoned it equal to 
fifteen ounces of silver, it was more valuable out of 
the circulation than in it, and it was therefore always 
exported in preference to silver, in payment of for- 
eign balances, especially after France and the rest of 
Europe had changed the relative legal value to one 
to fifteen and one half. After that, an ounce of gold, 
estimated in silver, was worth three and one third per 
cent, more abroad than at home, and, of course, under 
the circumstances, it would not circulate in the home 



ON CURRENCY IN THE UNITED STATES. 319 

currency. The cheaper money will push out of cir- 
culation the dearer the world over. From the organi- 
zation of the mint till 1817, over five millions and a 
half dollars in gold-pieces were coined, and very little 
indeed of it came into permanent circulation, for the 
simple reason that it was really worth more than it 
was counted to be worth by the regulations of the 
currency. It would, therefore, pay to melt it up, be- 
cause it was worth more as bullion than as coin. 

This state of things continued, the silver circulat- 
ing freely but the gold scarcely circulating at all, till 
the attention of Congress was called to the subject, 
and a law passed substantially rating gold in relation 
to silver at one to sixteen. The weight of the eagle 
was reduced to 258 grains from 270, and the alloy 
increased to one part in ten from one part in twelve. 
This increased at one jump the legal valuation of 
gold Gfifo per cent, as compared with silver, which 
remained as before. As the former ratio was a de- 
cided undervaluation of gold, so the law of 1834 as 
decidedly overvalued it ; and the working of a beau- 
tiful natural law became immediately apparent, by 
which thS current of the metals was reversed, silver 
now passing in preference to Europe to liquidate the 
balances of trade, and gold coming from Europe to 
the United States, where it was about three and one 
quarter per cent, dearer than in Europe, while silver 
was about three and one quarter per cent, dearer in 
Europe than in the United States. The metals go 
where they have the most consideration in exchange. 

Dr. Robert M. Patterson, who was the director of 
the mint from 1835 to 1851, under whose direction 
the present admirably improved machinery of the 



320 ELEMENTS OF POLITICAL ECONOMY. 

mints was introduced, and who thereby developed 
their capacity from a coinage of ^5,000,000 to $63,- 
000,000 per annum, drew up a new code of mint- 
laws, which was enacted by Congress in January, 
1837, by which the previous complicated legislation 
was all superseded, and on which the mint has been 
substantially administered ever since. In the first 
place, the French standard of fineness of nine tenths 
for both gold and silver was adopted, that is to say, 
one part alloy in a whole of ten parts. Since its 
adoption by us from the French, this decimal stand- 
ard of fineness has been adopted also by several other 
nations for their new coins, and thus some important 
steps have already been taken towards a most de- 
sirable end which is yet to be realized in the future, 
a universal currency for commerce. This change in 
the standard of fineness necessitated a change in the 
weight of the silver coins, if the established relation 
of one to sixteen was to be maintained. Accordingly 
the weight of the silver dollar was reduced from 416 
grains to 412j, and the lesser silver pieces in propor- 
tion. The weight of the dollar has remained at that 
figure ever since, but the smaller silver coins have 
been, as we shall see, still further reduced in weight, 
and the refusal of the dollar-piece to circulate has 
been another good illustration at our own very doors 
of the universal law that the cheaper money drives 
out the dearer. 

At different times since 1837 new denominations 
of coins have been added to our national series ; of 
gold, the double-eagle, the three-dollar, and the one- 
dollar piece; of silver, only the three-cent piece, which 
has never been popular, and will be superseded by 



ON CUERENCY IN THE UNITED STATES. 321 

the new three-cent copper piece. In 1853 very inter- 
esting alterations were made in the character of our 
silver coins ; up to that date the laws made both the 
gold and silver money a legal tender to any amount; 
and it was consequently optional with the debtor to 
pay in the cheaper metal, which ever it might be; 
and as experience was proving that the relative value 
of the two was not constant but variable, and that 
the legally established ratio of one to sixteen was de- 
pleting the currency of silver, it was then determined 
to make gold alone the legal tender, except to the 
extent of $5 ; to cease coining silver for individuals, 
and only coin on government account such sums as 
seemed to be in demand for purposes of change; and 
to reduce the weight of the half-dollar and its sub- 
divisions so that their nominal value should be con- 
siderably above their real value as compared with 
the silver dollar, and thus their exportation be pre- 
vented. Accordingly the weight of the half-dollar 
has been reduced from 206^ grains to 192 grains, and 
of the smaller coins in proportion. Government buys 
silver bullion at the market price, which has only 
varied for several years from f 1.21 to $1.22| per 
ounce, and coins this into f 1.25 of the smaller silver- 
pieces, thus charging a seigniorage of about three per 
cent. Consequently the half-dollars and lesser silver 
coins are overvalued in our currency, and a nominal 
dollar's worth of them worth l-tio per cent, less than 
a silver dollar. The result of these measures has 
been to establish gold as the real standard of the 
country, and to make silver entirely subsidiary to 
that. The copper coinage of the country consists 
now of four pieces ; of which the one and two cent 

2i 



322 ELEMENTS OF POLITICAL ECOISTOMY. 

pieces are composed of 95 parts copper, 3 tin, and 
2 zinc, and are respectively legal tender for ten and 
twenty cents ; while the three and five-cent pieces 
are composed of 75 parts copper and 25 parts nickel. 
The three-cent piece is legal tender to the amount 
of sixty cents. The five-cent piece is minted after 
the French metric system, weighing precisely five 
grammes, and five of them laid along in order meas- 
uring exactly a decimetre in length. The minting 
of this piece is the first official recognition, embod- 
ied in act, on the part of the United States, of the 
excellence of the metric system. 

It now only remains to characterize the new na- 
tional bank system, in its origin, structure, benefits, 
and dangers. 

When Secretary Chase assumed the Treasury De- 
partment in the spring of 1861, the state of the coun- 
try, and, of consequence, the state of the finances, 
were appalling. Mr. Buchanan's administration had 
just been trying to borrow a few millions of dollars 
of the people, and had only succeeded in securing a 
very small sum, and that at the enormous ratfe of 
twelve per cent, interest. The clouds of war which 
had been gathering black and sullen all the winter, 
soon broke in wrathful peals over the head of the 
new administration. The country must be defended, 
as well as the ordinary expenses of the government 
met ; an army must be raised, equipped, put into the * 
field, and paid. "We do not propose to follow the 
Secretary in his general financial embarrassments, 
expedients, and resources; but it is needful to our 
present purpose to say that, owing to the unexpected 



ox CURRENCY IN THE UNITED STATES. 323 

delays and disasters of the war, and to the conse- 
quent want of confidence in the public mind, he 
found it extremely difficult to borrow the sums ne- 
cessary to be had in order to meet the expenditures 
of the government ; and that in his first annual 
report to Congress, in December, 1861, he recom- 
mended, principally for the sake of facilitating the 
negotiation of loans, the organization of banking 
associations, whose circulation should consist only 
of notes, uniform in character, furnished by the gov- 
ernment, and secured as to convertibility into coin 
by United States bonds deposited in the treasury. 
It is clear that if such associations should be formed, 
it would make a market for the national bonds to 
the extent in which they should invest their capital 
stock in them as security for their circulation. Above 
all things, at that time the United States wanted to 
borrow money. It must borrow or perish ; and 
therefore a national banking system, based for secu- 
rity on the national debt, would open a market for 
some hundreds of millions of the evidences of that 
debt, and put a corresponding sum of immediately 
available funds into the hands of the government. 

This proposal of the Secretary, involving, as it did, 
the winding up of the State banks as such, found at 
first but little favor in Congress or among the people. 
The banking interests of the eastern and middle 
States, particularly of the State of New York, from 
whose State bank system the idea was mainly and 
by acknowledgment borrowed, were especially hostile 
to the scheme. In his second annual report, in 
December, 1862, the Secretary iterated his recom- 
mendation, and enforced it at length by arguments 



324 ELEMENTS OF POLITICAL ECONOMY. 

drawn from the necessity of effecting immediately 
more extensive loans, from the character of the cur- 
rency for soundness and uniformity thus furnished to 
the people, from the convenient agencies which such 
banks would furnish for the deposit of public moneys, 
and from the firm anchorage which such a system 
would give to the union of the States. These argu- 
ments, which found a response especially emphatic 
from the Western States, coupled with the assurance 
of the Secretary, that, if Congress should concur in 
his views, though corjscious of the great difficulty 
which vast, sudden, and protracted expenditures im- 
posed on him, he thought he should still be able to 
maintain the public credit and provide for the public 
wants, induced Congress to frame and pass " An act 
to provide a national currency secured by a pledge 
of United States stocks, and to provide for the circu- 
lation and redemption thereof." The act was ap- 
proved by the President February 25, 1863. 

Every bank organized under it invests its own 
capital stock in the bonds of the United States, 
bearing interest. These bonds are transferred to 
an officer of the treasury, called the comptroller, at 
Washington, who holds them as security for the 
redemption of the bills of such bank, but who pays 
the interest on them to the bank itself, so long as 
the bank redeems its bills promptly and violates no 
provisions of the organic banking law. Ninety per 
cent, of the amount of such bonds thus deposited 
with the comptroller, provided the bonds be esti- 
mated at par value and bear interest at a rate not 
less than five per cent., is then furnished by the 
treasurer to the bank in circulating notes, engraved 



ON CURRENCY IN THE UNITED STATES. 325 

and registered by the United States ; unless the cap- 
ital stock of the bank be more than $500,000 and 
less than $1,000,000, in which case only eighty per 
cent, of the capital is furnished in notes ; and if the 
capital be between $1,000,000 and $3,000,000, only 
seventy-five per cent.; and over $3,000,000, sixty per 
cent. These notes thus received by the banks, they 
issue to the people in ordinary loans and payments, 
and they are required by the law to keep on hand 
at all times twenty-five per cent, of their aggregate 
average circulation and deposits in lawful money of 
the United States, with which to redeem their notes 
on presentation. Thus the convertibility of the 
notes is dependent first on the solvency of the as- 
sociation, and, if that fails to redeem them, they 
are speedily redeemable, after certain formalities are 
gone through with, at the treasury of the United 
States; and so many of. the bonds belonging to 
such bank, deposited with the comptroller of the 
currency as security for the redemption of the notes, 
are then to be sold as shall reimburse the United 
States for such redemption ; so that it is almost im- 
possible under the law that the bill-holders of any 
national bank can ever suffer any loss. The United 
States holds the capital of the bank in its own 
hands, and is thus enabled 'to guarantee the con- 
vertibility of the bills. At the same time the system 
secures the manifold advantages of private capital, 
private enterprise, and personal sagacity and integ- 
rity, in the matter of loaning money, securing depos- 
its, and general management of the banks. 

The superiority in every respect of this scheme of 
banking to the fast and loose system which has pre- 



32^ ELEMENTS OF POLITICAL ECONOMY. 

vailed in. this country so long, is very apparent. In 
the first place, perfect publicity of the affairs of 
every bank is provided for in the organic ]a.w, and 
cannot be evaded. Every bank in the principal 
cities must publish a statement, under oath, at the 
beginning of every month, of its exact condition, 
and forward it to the comptroller; and the other 
banks must do the same every quarter, and the 
comptroller is to publish abstracts of these reports 
every quarter ; so that everybody can know the state 
of each bank in particular, as well as the state of 
the whole circulation. In the second place, the 
whole amount of the circulation cannot be increased 
at the will of the banks or the will of the comp- 
troller, or in any other way except by an act of 
Congress authorizing such increase; so that the sys- 
tem is not so liable to those sudden contractions 
and expansions which have been the bane of our 
paper money hitherto. In the third place, the gov- 
ernment pledges itself to receive these bills for taxes, 
excises, and all other dues, except customs' duties ; 
and makes them legal tender in all payments which 
itself has occasion to make, except the interest and 
principal of the public debt. If, to these provisions, 
there be added another, requiring all the banks to 
redeem their bills in New York, as well as at their 
own counters, the bills will be undoubtedly uniform 
in value all over the country, and debts can be paid 
by them through the post-office, or otherwise, with- 
out the mediation of any bank or the payment of 
exchanges. In the fourth place, it is to be noticed, 
that the United States absolutely guarantees the 
full payment of these notes, not simply as a trustee 



ON CURRENCY IN THE UNITED STATES. 327 

holding securities for the purpose, but as a principal 
pledging the public faith.i In the fifth place, besides 
the absolute security of ultimate redemption, the 
ratio of lawful money required to the aggregate cir- 
culation and deposits is much higher than has hith- 
erto prevailed in practice throughout the country. 
The ratio required of all the banks in seventeen of 
the principal cities of the Union is twenty-five per 
cent., and of the banks elsewhere fifteen per cent. 
This fifth point is subject to a material deduction to 
be made shortly. Add to these reasons this other, 
that the homogeneousness of the money circulating 
among them, in connection with a common creditor- 
ship towards the United States Government, is an 
additional bond binding the States and the people 
together, and tending powerfully to neutralize the 
centrifugal forces which are always at work in large 
societies and governments. 

But we shall get an idea too favorable to the new 
national banking system, unless we Look also at its 
dangers. The money which these banks are to circu- 
late is, after all, nothing but credit money, and will be 
liable in some degree to the disorders which are insep- 
arable from every form of credit. Credit is not pay- 
ment, but a promise to pay. The promise may be 
good, it may be sure to be fulfilled ; but it is not, and 
never can be made, the same thing as fulfilment. 
These bills bear upon their face the acknowledgment 
that they are promises to pay, and not the pay itself; 
and men are so constituted, and society is so deli- 
cately organized, that times are liable to come when 
men shall have a general distrust of mere promises, 

k 1 Walker's Science of Wealth. Page 233. 



328 ELEMENTS OF POLITICAL ECONOMY. 

and shall desire to see them changed into fulfilment. 
If a panic should ever arise in regard to these notes, 
and a general desire be manifested on the part of 
the holders to convert them into cash, it is evident 
hat many of the banks would be obliged to suspend 
specie payments, since they are only required to 
hold twenty-five per cent, of their circulation and 
deposits in cash, and this ratio, as a general thing, 
is not likely to be exceeded. It is true that their 
notes cannot all come back at once for redemption, 
nor indeed any very considerable proportion of them, 
since, unlike the circulation of the State banks, they 
will pass freely beyond the boundaries of States and 
sections, and become necessarily very widely dif- 
fused ; yet general confidence is a thing so sensitive, 
and credit money is in its nature such, that an abso- 
lute freedom from panics and from supensions can- 
not rationally be predicted. They are liable to 
come : it will be strange if they do not come. 

In the second place, the legally required ratio of 
lawful money to liabilities is largely weakened, as 
the law now stands, by the provision that " bank bal- 
ances and clearing-house certificates shall be deemed 
to be lawful money." As far as the immediate con- 
vertibility of the notes is concerned, it is evident that 
this clause neutralizes to a large extent the natural 
effect of the required ratio. Bank balances are not 
cash. If real, and not fictitiously created, they are a 
part of the assets of the bank, but their virtue is too 
remote, in most cases, to help any bank sustain a 
"run." What is wanted in order to convert notes 
and to allay a panic is not assets, however good they 
may be, but' specie itself. While, therefore, this 



ON CURRENCY IN THE UNITED STATES. 329 

clause was a concession to the banking interests, it 
clearly jeopardizes those of the people. In fact, the 
framers of the law were so anxious to make it ac- 
ceptable to the interests arrayed against it, that large 
dividends can be much more safely predicted from it 
for the banks than prosperity and security for the 
people. Thus far in their history the redemption of 
these notes has been a mere mockery. They have 
been redeemed, if any one has desired it, in United 
States legal-tender notes ; that is to say, one credit 
has been redeemed by another credit no better than 
itself. 

But the most imminent danger that threatens this 
system is this: that Congress will unwisely increase 
the amount already authorized to be issued before 
the system gets fairly settled and the resumption of 
specie payments takes place. This is every way to 
be deprecated. The system will be comparatively 
sound provided only that Congress refuse to add 
to the present amount of $300,000,000. When the 
war broke out, the whole paper circulation of the 
country, north and south, was only f 202,000,000 ; 
and in the loyal States, $150,000,000 ; and on the 
first of January, 1862, in the loyal States, only 
$130,000,000, according to the authority of Secre- 
tary Chase. Now, we do not want an exclusively 
paper currency. We want a broad substratum of 
gold and silver underneath it to support it, control it, 
and redeem it. There ought to be at least as much 
of gold and silver in the currency and in the banks 
as of paper money. The English have more. That 
is the grand reason why the British currency is so 
sound and excellent ; not that a part of it is credit 



330 ELEMENTS OF POLITICAL ECONOMY. 

money, but that the greater part of it is gold and 
silver. 

But while I concede so much as this to the na- 
tional banking system, and to such convertible paper 
money as is proposed to be issued under it, my own 
conviction is clear, that no form of paper money is, 
or ever can be made, equally advantageous with 
coin. Considering the state of public opinion, and 
the usage of the more enlightened commercial na- 
tions, one should speak on this subject with caution, 
but for myself I do not believe that paper money, in 
any variety of it, ever made a nation, on the whole, 
richer or happier. Let the money of the nations be 
gold and silver coins ; let these be minted on some 
universal scheme for commercial convenience ; let 
nothing be used- as a measure of values but the de- 
nominations of these coins ; then, in connection with 
such money as a basis, money which will hold its 
units, whether pound, dollar, or franc, as invariable 
as such measures can be kept, let there come in the 
various expedients of paper credit, such as certifi- 
cates of deposit, bills of exchange, checks, drafts, or 
what name soever they may bear, and most, if not 
all, the conveniences of paper money will be secured, 
and none of its fluctuations and disasters experi- 
enced. These forms of paper would not be money, 
although they might be made to perform much more 
than they do now one of the functions of money, 
that is to say, they would serve in large and distant 
transactions as a medium of exchange, but they 
never could disturb, as paper money usually does, 
the measure of value. Under this system banks 
would still be necessary for the purpose of loaning 



ON CURRENCY IN THE UNITED STATES. 331 

money, buying and selling credits, making collections, 
and so on, but they would not manufacture and issue 
money. This plan of a perfect currency seems to me 
preferable to that of Mr. Walker, who advocates what 
he calls a mercantile currency^ that is, a paper money 
issued by banks, but based dollar for dollar on specie 
actually in reserve. Such a currency, as he admits, 
would be local and conventional, but it would also 
be as invariable in value as specie, and more con- 
venient. But as this plan requires the minting and 
maintaining of just as much specie as the other, as 
it would always be difficult to secure that all the 
banks should always have as much of coin in re- 
serve as of paper circulating, and as the element of 
credit enters into the nature of such paper money, I 
think it more in accordance with natural laws, more 
easy to be realized, and more sure to be satisfactory, 
to have but one kind of money, and that gold and 
silver, and then to obviate the inconveniences of 
large and distant transfers of it by paper which shall 
be openly and only credit, and which, as it is not 
money, can never influence the denominations of 
value. Thus the two legitimate spheres of money 
and of credit will be kept entirely distinct. 



332 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XII. 

ON CREDIT. 

Political Economy is the science of exchanges ; 
but there are certain exchanges which have this pe- 
culiarity, that the transaction is not then and there 
ultimately closed, but one (or both) of the persons 
exchanging relies on the good faith of somebody to 
fulfill in the future a promise expressly or impliedly 
made in the exchange. This peculiarity is very im- 
portant to be considered, and gives rise to all those 
phenomena which pass under the general name of 
Credit. Debt and Credit are synonymous terms. 
There is no debt without credit, and there is no 
credit without debt. The whole subject of credit is 
best unfolded by considering what is involved in the 
relation of debtor and creditor. This is wholly a 
personal relation ; it always involves the element of 
future time, and is founded on the belief of one of 
the parties in a virtual promise made by the other. 
Hence the term credit from Credo, I believe, and the 
corresponding term debt from Debeo, / oive. Two 
other terms sometimes used in this connection ar.' 
so ambiguous as to require explanation, namely, the 
terms loan and borrow} If 1 loan a book to my 
friend, I expect him to return to me that particular 

1 For this point and some others in this chapter, not contained in my 
previous editions, 'l am indebted to Mr. Macleod's " Banking," passim. 



ON CREDIT. 333 

book, and I do not alienate to him my ownership in 
it at all ; but if I loan him ten dollars, I alienate to 
him completely my property in that money, and only 
expect him to return me an equivalent at some fu- 
ture time. In the last case there is credit and debt, 
but not in the former case. So of the word borrow. 
I may reclaim from a neighbor a borrowed tool, even 
without his permission ; but I may not take back ten 
dollars he has borrowed from me, because I happen 
to find his purse. I have a claim on him for ten 
dollars, but he must pay me voluntarily, or be com- 
pelled by legal process. This illustrates what is said 
above, that the relation of debtor and creditor is a 
personal relation. It has nothing to do with any 
specific commodity. It is substantially a claim of 
one person on another person, and is based on good 
faith only. 

This claim, however, of the creditor on the debtor 
is just as much property as anything else is property. 
The right to demand from the debtor at some future 
time an equivalent for what the creditor renders is 
the service which the creditor receives from the debtor 
at the time of the exchange. It is a clear case of 
value. Each renders to the other satisfactory equiv- 
alents. The right to demand a future equivalent is 
the present equivalent for the sake of which some- 
thing else is rendered. All our definitions apply 
here perfectly. Considered as a mere case of value, 
the transaction is ended ; but, considered as to the 
nature and basis of the exchange, the transaction is 
not yet closed. It follows, then, that Credits and 
Debts are Rights not yet realized; but which are, 
nevertheless, constantly bought and sold. What 



334 ELEMENTS OF POLITICAL ECONOMY. 

lies between creditors and debtors may be called in- 
differently debts or credits : it is of vital consequence 
to persons^ whether they owe or are owed by others ; 
but the rights alone become the subject of exchange, 
and the terms merely relative to persons become in- 
different. The amount of transactions in credits is 
immense in every commercial country, and is becom- 
ing constantly greater. Not only are the exchanges 
very common in which the right to demand future 
payment is one of the services rendered, but the ex- 
clusive traffic in debts — exchanges of one form of 
debt for another — has already reached gigantic pro- 
portions in all parts of the world. In order that this 
form of exchanges may take place, it is of course 
needful that there should be a general confidence in 
the public mind; in other words, a general expecta- 
tion that such debts will be promptly paid. As indi- 
cating a common honor and financial ability among 
business men, and as facilitating the production of 
services of all sorts, this state of general confidence 
is so desirable in the sphere of exchange, that great 
pains should be taken that notliing occur to destroy 
it. Credit-exchanges are naturally more sensitive 
than any other, since they walk by faith and not by 
sight. For reasons to be adduced shortly, they are 
more liable to be unduly multiplied than other ex- 
changes are. The credit "system is a great blessing 
to mankind, but, like all other great blessings, is very 
likely to be abused. 

The right to demand a future payment of some- 
thing from somebody is a species of incorporeal 
property well guarded by law ; and, though itself 
intangible, is commonly, but not necessarily, re- 



ON CREDIT. 335 

corded on paper. The paper is the evide.nce of the 
right, and not the right itself. These paper documents 
are termed Instruments of Credit, and are of two 
kinds : first, Promises to pay, and second. Orders to 
pay. We will first look at the^e principal forms of 
Credit, and then at its advantages and disadvantages. 
(1.) Book Accounts. A charge in a trader's 
books is both a current and a legal evidence that 
the person charged has received a certain service, 
and has virtually promised to render the sum charged 
as a return service. This is the most common of 
the forms of credit; and if the person charged fails 
of his own accord to complete the exchange thus 
commenced, the law, in the absence of any proof to 
make the charge suspicious, collects it, if possible, 
and forcibly completes the exchange. The conven- 
ience of this form of credit is so great that it is not 
likely ever to be disused ; and as between people 
who deal much with each other is very useful, inas- 
much as their respective book accounts are set 
against each other in settlement, and only balances 
are required to be cancelled in money. It is for the 
benefit of both creditor and debtor, however, that 
such credits should be shoijb in time, and such settle- 
ments frequent, since thus only does the creditor 
realize the gains of the exchange, and the debtor 
keep fair his mercantile name. If it be difficult or 
impossible to follow strictly the excellent financial 
maxim, " Pay as you go," the next best thing to 
that is, " Go and pay." The gains of an exchange 
are lessened, or its terms become more onerous, just 
in proportion as delay in its completion is experi- 
enced or expected. Book accounts are subject also 



336 ELEMENTS OF POLITICAL ECONOMY. 

to this disadvantage as compared with other forms 
of credit, that their number and amount as against 
any person are less likely to become publicly known, 
and therefore he is more likely to be trusted in this 
form by others beyond tjie point of his solvency 
and their safety. 

(2.) Promissory notes. These are issued by indi- 
viduals, corporations, and nations. They are usually 
on interest ; and in this case, if the principal be con- 
sidered secure, and the interest be promptly paid, 
the element of time is comparatively a matter of 
indifference, because the interest is compensation for 
delay, and is frequently the motive on the part of 
the holder of the note for rendering that service of 
which the note is evidence. When such promis- 
sory note, or other form of credit, is payable to 
bearer, it may run a devious round, may play a part 
in many a transaction ; but it is in reality nothing 
but a general warrant entitling the holder, in view of 
some original service of the claim for the return of 
which he has become in some manner possessed, 
to take his satisfaction for that service whenever he 
will. It is like the land warrants, given by the 
United States, entitling the holder, in return for mili- 
tary service rendered, to locate his acres on any unoc- 
cupied national land within the national boundaries. 
As a warrant, its function ceases so soon as the acres 
have been chosen. Credit passes into payment. 
The private notes of individuals and corporations 
are payable in money, and if in credit-money, this 
itself ends in something that is not credit, and thus 
the circuit of exchange is completed. 

When the United States borrows money, it gives 



Oisr CREDIT. 337 

the lender a promissory note on interest at a certain 
rate, both principal and interest being payable at 
certain specified times. These notes are called indif- 
ferently bonds, stocks, or funds. The government is- 
sued in 1862-1865, both inclusive, about $2,500,000,- 
000 worth of them, in return for money loaned to it 
by the people, and they bear interest at rates varying 
from 5 to 7i^ij per cent., and are payable at periods 
varying from three to forty years. The bonds des- 
ignated as " five-twenties," bear gold interest at six 
per cent., and the government reserves the right to 
pay the principal in five years, and pledges itself to 
pay it twenty years from date. So of the "ten- 
forties." The "seven-thirties" are so named, not 
from the time of payment, but from the rate of inter- 
est, which is VjVV per cent., payable in legal tenders 
for three years, when the principal is payable in the 
same, or fundable in six per cent, gold-bearing 
bonds, at the option of the holders. So ready have 
the American people been to loan money to their 
government for the past few years, and take these 
bonds as security, that the treasury has experienced 
very little embarrassment from the want of money, 
although the expenditures have been at times over 
$3,000,000 a day. In the course of one week in the 
spring of 1865, ninety and odd millions of dollars 
were subscribed to a national loan. It is believed 
that the history of national borrowing presents no 
parallel with the late success of the United States 
in realizing money in the way of loans. The largest 
English loans ever made were made in 1812 and 
1813, during the wars with Napoleon and the United 
States. In these two years the British exchequer 

22 



338 ELEMENTS OF POLITICAL ECONOMY. 

borrowed $534,000,000, being an average of $22,- 
250,000 a month, and pronounced that a wonderful 
financial achievement, as it was ; but, from an ag- 
gregate of national wealth not larger than Eng- 
land's then was, though from a larger population, 
the United States has realized in four years from 
loans a sum about five times as large as that, and 
at an average rate of interest but little higher than 
England then paid, which was five per cent, and 
a fraction.^ The treasury notes commonly called 
greenbacks are promissory notes not on interest. 
They were made a legal tender for all debts public 
and private except duties on imports and interest on 
the public debt. 

(3.) Bank bills. Bank-bills are a form of prom- 
issory notes not on interest, and thus differ from the 
notes of ordinary corporations ; but the bank offers, 
as a sort of compensation for the privilege of circulat- 
ing notes not on interest, to convert them into coin 
on demand of any holder. It is this proffered con- 
vertibility into coin that enables the promissory notes 
of a bank to circulate as money, while the notes of 
other corporations and individuals equally solid and 
solvent do not circulate as money. It must be borne 
in mind, however, that the offer to convert tham into 
cash does not essentially alter the nature of bank- 
notes ; they are a form of credit; and although they 
are commonly issued against another form of credit, 
namely, against the interest-bearing notes of individ- 
uals who resort to the bank for discount, this only 
complicates the exchange without changing its na- 
ture. It is an instance of exchanging one form of 
credit for another which happens to have a greater 

1 Appleton's Annual Cycjopasdia, 1863. Article, " Finances." 



ON CREDIT. 339 

currency or validity than the first, and for this supe- 
riority of the bank credit the individual credit pays 
an interest, in other words, is discounted ; and such 
exchanges of one form of paper credit for another, 
with or without a premium, may go on indefinitely; 
as credit money, such paper may serve as a medium 
in many exchanges ; but ultimately, and before the 
entire series of transactions is closed, such paper is 
to be exchanged for something that is not paper; it 
is redeemed in cash, or gives a claim to something 
no longer credit which is in reality the return service 
for the original service rendered. 

(4.) Bank Deposits. Mr. Macleod gives the fol- 
lowing definition of a banker : " A banker is a trader 
who buys monei/, or money and debts, by creating' other 
debts J' A merchant is a dealer in commodities ; a 
banker is a dealer in credits. The work bank meant 
originally a mass, an accumulation; as we still say, 
a sand-bank, and the banks of a river. When first 
applied to commercial transactions, as it was in Ven- 
ice as early as 1171, it meant a common contribution 
of money then made by the citizens to the state ; 
and also the place where commissioners paid the in- 
terest on this loan, and the shares in it were trans- 
ferred. Both of these meanings inhere in the mod- 
ern word bank. A bank is a place to which the 
money of other people is brought, as well .as the 
banker's own ; and hence we speak of banks of de- 
posit : it is a place in which one form of credit is 
exchanged for another form ; and hence we speak of 
banks of discount : it is frequently a place where 
promissory notes, designed to circulate as money, are 
issued ; and hence we speak of banks of circulation. 



340 ELEMENTS OF POLITICAL ECONOMY. 

These three are the main functions of banks; and 
of these, the two former are, while the third is not, 
essential to banking. The central idea in banking 
is this : the banker receives his customers' money, 
and renders to them in return a credit, that is, a right 
to demand from him an equal sum at a future time. 
The evidence of this right is entered upon the bank- 
er's books, and thus becomes a Deposit. The own- 
ership of the money passes completely from the cus- 
tomer to the banker. The latter has the right to do 
just what he pleases with it ; but he must be ready 
to respond to his customer's call, when the latter de- 
mands, not his own money, but so much of his bank- 
er's money. A deposit, therefore, is not the thing 
deposited, but a credit. Th.e banker buys money 
with credit. 

The motive that leads the customer to intrust his 
funds to the banker is the desire, not to have those 
specific funds kept safely, (for, the moment they have 
passed into the banker's hands, they are his abso- 
lutely,) but to have the right to call on the banker 
for such sums (not to exceed the deposit in the ag- 
gregate) and at such times as may suit his own con- 
venience. He has such confidence in the integrity 
and solvency of the banker, and finds it so practi- 
cally convenient to have dealings with him, that he 
prefers' a credit on him for the amount to the posses- 
sion of the money itself. The motive of the banker 
to receive his customers' funds on these terms is the 
fact that he can safely use a large portion of these 
funds in other operations in credit profitable to him- 
self, and at the same time be sure of being able to 
meet his customers' calls for money. He finds by 



ON CEEDIT. 341 

experience that many of his customers wish always 
to have a balance in his hands ; that while some of 
them are constantly drawing on him for cash, others 
of them are as constantly depositing with him in 
cash, and that consequently he can use with safety a 
part of the money he has purchased with his credit 
to purchase other credits with. 

This brings us to the second essential function of 
banking, namely, the discounting of bills. The 
banker uses his cash to buy credit, as well as his 
credit to buy cash. The credits that he buys are 
what are usually called mercantile bills. Manufactu- 
rers and wholesale merchants usually sell goods on 
time, as it is called, say three months. A debt is 
thus created. The manufacturer or wholesaler is 
creditor and the jobber or retailer is debtor. But a 
debt is property ; and the creditor in this case wishes 
to avail himself of his property at once for further 
production ; so he draws a bill upon his debtor, which 
the latter indorses, and this piece of property is ready 
for sale. The banker buys it, that is to say, the 
creditor passes over to him the right to demand pay- 
ment of the debtor at the end of three months, and 
receives from the banker either money, or so much 
of the banker's credit, that is, a deposit in the cred- 
itor's favor in the banker's books. For furnishing 
this creditor either with ready money or a more 
available credit in lieu of his mercantile bill, the 
banker charges a percentage. This is discount. 
Discount is the difference between the face of a bill 
and its price. This is the chief source of profit in 
ordinary banking. When the bill matures, the 
banker realizes from the debtor its full face. It is 



342 . ELEMENTS OF POLITICAL ECONOMY. 

thus in part through the purchase of bills for money 
that banks derive their character as money-lenders. 
Also, such reserve sums as they do not wish to in- 
vest in bills, on account of the time involved before 
they mature, banks frequently loan on call to those 
who have salable collateral securities to pledge. So 
far forth they become direct money-lenders. The 
buying of bills for money is mainly done in England 
by another class of dealers called bill-discounters, 
and is coming to be done somewhat in this country 
by retired merchants and others ; though most of our 
banks continue to do it in connection with their 
function of issue. It is more in accordance with 
genuine hanking' to buy bills with credit, that is, by 
passing the price of the bills to the seller's credit in 
the form of a deposit. These deposits are all prom- 
ises to pay on de^^mand. A balance to a customer's 
name on a banker's books is, with reference to the 
customer, property, and, with reference to the banker, 
a promise. 

These four are the principal forms of credit which 
are virtually promises to pay. There are others 
which 'are virtually orders to pay. 

(5.) Bills of exchange. A bill of exchange is a 
written instrument designed to secure the payment 
of a distant debt without the transmission of money, 
being in effect a setting off or exchange of one debt 
against another. Thus, suppose A in Boston owes 
B in New York $1000, and another party, C in 
New York, owes A in Boston a like sum ; it is not 
necessary that A should send the money to B to 
cancel his debt, and C send the money to A for a 
like purpose ; the two debts, by means of a bill of ex- 



ON CREDIT. 343 

change, are set off against each other, and both trans- 
actions are closed without sending any money from 
one city to the other. A draws a bill upon C, direct- 
ing him to pay B |1000, and sends this bill to C, 
who, if that mode of payment be satisfactory to 
him, accepts it by endorsing his name upon it, which 
completes the transaction between A and C, and 
then presents it with payment to B, which completes 
the transaction between B and A. A is called the 
drawer of the bill, C the drawee until he has en- 
dorsed, and then the acceptor, and B is the payee. 
Sometimes the bill passes through several hands, 
which may either be by successive endorsements, 
specifying to whom payment is to be made, or by 
what is called an endorsement in blank, by which is 
meant that the payee or subsequent holder, to whom 
the bill has been endorsed, merely writes his own 
name upon the bill, which is equivalent to making 
it payable to bearer. The remarkable convenience 
of bills of exchange in adjusting debts between dis- 
tant places has already brought them into very 
general use wherever the necessary basis for them 
in commercial integrity is supposed to exist ; and 
every year is witnessing an extension of their use 
in all commercial countries. Bills of exchange are 
either payable at sight, or after an interval fixed in 
the bill itself; and are either inland or foreign bills. 
Bills which have some time to run before inaturity 
are frequently discounted by bankers or other money 
lenders, that is to say, the payee transfers the bill to 
them, receiving the amount, minus interest for the 
time it has still to run ; and the bill thus serves the 
important function of enabling a debt due from one 



344 ELEMENTS OF POLITICAL ECONOMY. 

person to be made available for obtaining credit 
from another. It is a principal part of the business 
of banks to buy in this manner bills of exchange, 
either real bills, or accommodation bills, so called, 
which only differ from the others in that there is no 
real debt between the drawer and drawee, and col- 
lect them at maturity, thus securing bank interest 
on all money paid in purchasing such bills. The 
bills are -discounted on the joint credit of the drawer 
and acceptor. It is evident that the use of bills of 
exchange, especially those which pass from hand to 
hand by endorsement, dispenses with the use and 
transmission of large amounts of money, and, as 
between distant places especially, is one of those 
economizing expedients of credit which are the 
birth of modern civilization and a sound mercantile 
honor. 

Very similar are foreign bills of exchange in their 
functions and usefulness. Commercial relations be- 
tween two countries, say for example, France and 
England, always give rise to a mutual indebtedness 
of their merchants, and if these debts were all to be 
paid by the actual sending of money to and from, 
there would have to be a constant and expensive 
outward and inward flow of the precious metals in 
respect to each country, which necessity is neatly 
obviated by the use of bills of exchange, and coin 
is only transmitted to settle the balances on which- 
ever side there is an excess of debt. French dealers 
are always sending goods to England, and English 
dealers goods to France ; and for what they send to 
England the French merchants draw bills on the 
parties to whom the goods are consigned, and the 



ON CREDIT. 345 

English merchants draw similar bills on their debt- 
oiri in France ; these bills are bought up by bankers 
or brokers in either countiy, and exposed again for 
sale to any parties who may have debts to pay in 
the other country. Thus bills on London, in other 
words, on English debtors, are always for sale in 
France ; and bills on France, that is, on French 
debtors, are always for sale in London ; the mutual 
debtors of the two countries, therefore, instead of 
sending coin to cancel their debts, buy and trans- 
mit these bills. As I wish to make the course and 
par of international exchange very plain to my read- 
ers, I will give a particular illustration. Suppose 
Pierre & Co., of Paris, send a cargo of wine to Bar- 
clay & Co., of London, worth £5000; the London 
firm thereby becomes indebted to the Paris firm to 
that amount, and Pierre & Co. draw a bill on Bar- 
clay & Co. for £5000; if they themselves have no 
debt to pay in London, they sell this bill to a Paris 
broker (if the exchange be then at par) for its face, 
minus interest for the time it has to run ; and this 
broker is now ready to sell the bill again to anybody 
in Paris who has a debt to pay in London ; and the 
person in London who receives it in liquidation of a 
French debt to him, presents it at maturity to Bar- 
clay & Co. for payment. A bill drawn in London 
for a cargo of hardware sent to Paris, is similarly 
negotiated with a London broker, and finds its way 
similarly to France, in payment of some English 
debt, and ends its career when it reaches the French 
firm on which it was originally drawn. We are 
now in position to understand clearly what is meant 
by the par of exchange. The merchants in Paris, 



346 ELEMENTS OF POLITICAL ECONOMY. 

who have debts due to them in London, draw bills 
of exchange for the amount of these debts, and, 
through the agency of middlemen or brokers, go 
into the market to sell these bills to other Paris mer- 
chants who have debts to pay in London. If the 
former set have a larger amount to sell than the 
latter have occasion to buy, in other words, if there 
be a larger amount of debts due from London to 
Paris, than from Paris to London, then the compe- 
tition of the sellers of bills on London will lower 
their price somewhat in the market, in order, as 
usual, that the supply and demand may be equal- 
ized. In this case the par of exchange is disturbed, 
a bill on London for £100 may not sell for over 
■£99, and the exchange is then said to be one per 
cent, against London, or, which is the same thing, 
one per cent, in favor of Paris. The par of ex- 
change, therefore, between two countries, depends 
upon the substantial equality of their mutual debts; 
and if an exchange unfavorable to either continues 
long, and especially if the discount on its bills be 
sufficient to cover the charges of the transmission of 
specie, gold will begin to flow from the country 
against which the exchange has turned, and the 
equilibrium of payments, and hence the par of ex- 
change will be restored. Also, the par tends to 
restore itself, without the sending of specie, in this 
way : if bills on London are at a discount in Paris, 
for the same reason that they are so will bills on 
Paris be at a premium in London, and therefore 
there will be a direct encouragement to the extent 
of the premium for exportations from England to 
France, because on every cargo sent bills can be 



ON CREDIT. • 347 

drawn and sold in London for a premium ; but the 
more bills on Paris thus offered, the more the pre- 
mium disappears, and the par of exchange is restored 
so soon as the debts thus contracted by France are 
equal to the debts due her from England. At the 
same time, and so long as the discount on London 
bills continues, there is a discouragement to further 
exportations from France to England, because the 
bills drawn in virtue of such cargoes can only be 
sold below par. Here is another instance of a mag- 
nificently comprehensive law by which Nature vindi- 
cates her right to reign in the domain of exchange. 
It is through this law, stimulating exportations on 
the one side, and slackening them on the other, that 
most of the casual disturbances of the par of ex- 
change are rectified ; but if, notwithstanding this, 
the disturbance continues obstinate, it indicates one 
of two things as true of the country against which 
the exchange has turned : it has either made over- 
purchases of the other country beyond the power of 
its ordinary exports to cancel, or the money in which 
the bills drawn on it are liable to be paid is an 
inferior money. In the first case, the only proper 
remedy is an export of gold to pay off the old scores, 
and a more prudent method of purchasing in the 
future; in the second case, which is well exemplified 
in the instance of Amsterdam, cited in a preceding 
chapter, the remedy is to raise the currency to a 
good specie standard. When the rates of exchange 
were first established between England and the 
United States, the pound sterling was reckoned as 
equal to $4.44 of our money ; since then the weight 
and fineness of our gold coins have been reduced. 



348 ELEMENTS OF POLITICAL ECONOMY. 

and the real par of exchange is one pound for $4.87; 
the old nominal par however remains as the stand- 
ard, so that the exchange is really at par when it 
stands in the quotations as 109^, or 9i per cent, 
above par. Our gold dollar contains 23.2 grains of 
fine gold, and the English sovereign 113 grains and 
a fraction, and the true par therefore is 4.87 for 
1. The par of exchange between France and the 
United States is 5 francs 17 centimes for $1; and 
between France and England, is 25 francs 20 cen- 
times for £1. 

(6.) Checks. Formerly, in England, and in other 
countries as well, every considerable dealer kept his 
strong box, and when he had Occasion to make pay- 
ments, told down the solid cash upon his own 
counter. Afterwards, the goldsmiths of London 
solicited the honor of keeping in their vaults the 
spare cash of the merchants, who in their payments 
aq^iong one another came to employ checks drawn 
on the goldsmiths, and at the shops of the latter 
the principal payments in coin were effected. The 
later introduction of banks brought along with it 
the custom, now continually widening in commercial 
countries among all classes of people, of keeping 
one's funds with a banker, and making payments 
by orders, or checks, upon him. When the person 
making the payment and the person receiving it 
keep their money with the same banker, there is no 
need of any money passing at aU in the premises, 
the sum being merely transferred in the banker's 
books from the credit of the payer to that of the 
receiver. The banker is quite willing to do this 
business for nothing, and even to allow the depos- 



ON CREDIT. 349 

itors a low rate of interest on all balances remaining 
in his hands, in consideration of the privilege he en- 
joys of loaning such proportion of the sums as he 
deems safe to other parties at a higher rate of inter- 
est. In the large cities, by an arrangement called- 
" the clearing-house," substantially the same ben- 
efits are secured as if all the people of the city 
kept their cash at the same bank ; inasmuch as all 
the checks drawn oii each of the different banks, 
and passing in the course of the business day into 
other banks, are assorted before evening at the clear- 
ing-house, and set off as far as possible against each 
other, leaving only balances to be adjusted in money. 
So long as the banks are strong and solvent, the 
safety of such checks is only surpassed by their con- 
venience, which itself is enhanced by the facility 
with which they pass by endorsement from hand to 
hand, perhaps a dozen times in a morning, making 
payments equal to their face as often as they are 
transferred, and thus dispensing with the use of 
large masses of coin. A draft is in substance the 
same as a check. Both are bills of exchange. Each 
is the order of one person addressed to another to 
pay money to a third. A bill of exchange drawn by 
one banker on another has usually in this country 
been termed a draft. So far of the ipstruments of 
credit. Some of the advantages of credit have been 
already anticipated in the discussion of its principal 
forms; but we will now instance more specifically a 
few of these advantages. 

1. There are some men, and particularly young 
men, who have integrity and industry and skill, but 
no capital ; and when such men are enabled to borrow 



350 ELEMENTS OF POLITICAL ECONOMY. 

money to start themselves in business, or to enlarge 
a business already in successful operation, the gen- 
eral interests of production, as well as their personal 
interests, are subserved by such credit, because in all 
probability capital thus passes from hands which are 
less to hands which are more able to use it produc- 
tively. Those who are best able to make capital tell 
are generally those who are most desirous to obtain 
it, and frequently those who can offer the best secu- 
rity for its replacement. Nothing is to be said against, 
but everything in favor, of such a loaning of capital 
as shall bring it, under safe conditions, from the hands 
of the idle, the aged, those indisposed, or those in- 
competent to use it productively, into hands at once 
competent and honest. Such credit is a benefit, and 
only a benefit, to all the parties concerned, and to 
society at large. The operators retain something of 
profit after replacing the capital with interest; the 
lenders receive more than if their capital remained 
idle, or they employed it -themselves; and society ia 
benefited by a more complete development and rapid 
circulation of services. Despite all the instances of 
broken faith, it is still an honor to human nature that 
men do so gain by good character the confidence of 
their fellows that they are, and ought to be, trusted 
with capital on their simple word or note ; and it is 
the glory of free political institutions, that under their 
influence, more than elsewhere, young men with no 
other dower than integrity and purpose do rise, by 
the help of so slight a stepping-stone as this, in 
crowds, to the high places of opulence. In the point 
of view, that thus all the available capital of the com- 
munity is brought out into prgductive activity, too 



ON CREDIT. 351 

much can scarcely be said in favor of joint-stock 
companies, whose managers are known to be men 
of probity, which gather up the driblets of unoccu- 
pied capital here and there, and, combining them, 
enter upon paths of profitable production, which 
individual enterprise cannot tread. Too much can- 
not be said in favor of savings-banks, which take the 
surplus earnings of the poor, and not only keep them 
safely, but pay a fair interest on each deposit, and 
loan the aggregate at a higher rate on choice secu- 
rities, thus stimulating frugality in a wide circle of 
depositors, and at the same time aiding production 
by opportune loans to the best class of borrowers. 
Here too come in life-insurance companies, which 
illustrate the advantages of credit in a most gratify- 
ing light, and whose action I hope to see extended 
to larger and larger classes of men, since it tends to 
transmute low and selfish cares into a noble care for 
those who are to come after, who might otherwise 
be left penniless dependants, and by elevating and 
enlarging the views of men, to make them better pro- 
ducers and better citizens. In this category of the 
advantages of credit come also the ordinary bank dis- 
counts, made for short periods only, holding the debt- 
or to the strictest rules of payment, only professing 
and only enabled tq help customers over the transient 
hard places in their business, and not to furnish the 
funds on which the business is mainly conducted. 
Sums drawn from the banks on credit should only 
form a part of the circulating capital of a business, 
and never be put into the form of fixed capital. The 
passing necessities of a business having an indepen- 
dent basis of its own can be safely and conveniently 



352 ELEMENTS OF POLITICAL ECONOMY. 

met by bank discounts. So far as the capital stock 
of a bank is made up of small subscriptions, it has 
the advantage just spoken of, of calling otherwise 
idle sums into activity ; and so far as no undue priv- 
ileges are accorded to it by law, there is no branch 
of industry more legitimate and beneficial than bank- 
ing. It is no essential part of the functions of a 
bank, that it manufacture and issue money ; the 
money it loans should be the national money ; and 
if that, unfortunately, be credit money, the element 
of credit in the money should be sharply discrimi- 
nated in the public mind from that element of credit 
by which the bank loans it to its customers. Bank 
credits are good, but that does not prove that credit 
money is good; and it. was one ground of the 
viciousness of the late banking system of the United 
States, that the different kinds of credit involved in 
it were inextricably interwoven with each other in 
the common apprehensions, and when the money 
failed utterly, as it did repeatedly, to answer the pur- 
poses of money, people could not exactly tell whose 
fault it was. 

2. There is another class of advantages in credit, 
which do not depend so much on the transfer of 
capital from less to more productive hands, as on the 
facilities which credit affords in economizing the gen- 
eral operations of exchange. Here the advantages 
are derived from the convenience of settling accounts 
arising out of exchanges, rather than from the char- 
acter of the exchanges themselves. Look, for ex- 
ample, at bills of exchange. They serve to settle up 
the accounts arising from the commerce of two con- 
tinents, with but little transmission of money from 



ON CREDIT. 353 

either, and with but little loss of time. Bills drawn 
in New York on London are usually payable at 
sixty days' sight ; and the merchant dispatching a 
ship is able to realize at once the value of her oargo, 
minus interest for the time his bill has to run ; he is 
indeed still liable in part to see that his bill is ulti- 
mately paid by his drawee; but the commercial integ- 
rity of the leading houses in all countries is with 
justice so firmly believed in and acted on, that on the 
whole but little anxiety springs from this source. It 
is one of the noble things in international commerce 
that men trust each other across the oceans, and lay 
millions of value on the faith of a single 'firm. Inland 
bills of exchange equally facilitate settlements within 
the country itself; and checks contribute to the same 
end even more simply, passing readily in payments 
wherever the parties are known, and, though credit, 
doing the work of money more conveniently, and 
within certain limits as safely as money itself could 
do it. The face of a check drawn to the amount of 
his deposit in favor of another depositor is trans- 
ferred in the banker's books from the credit of the 
drawer to that of the payee. The banker is released 
from one debt by creating another of equal amount. 
The drawer is released from a debt by causing an- 
other debt to be transferred to the payee. The payee 
is paid by the drawer by the receipt of another debt. 
Thus we see that a release from a debt is the same 
thing as a payment in money ; and we saw in the 
paragraph on bills of exchange that the mutual re- 
lease from debts is the same thing as a reciprocal 
payment of debts. 

3. It is not strange that some thinkers and writers, 

23 



854 ELEMENTS OF POLITICAL ECONOMY. 

seeing these unquestionable benefits of credit even 
within the peculiar sphere of money itself, have 
come, like Herbert Spencer and many others, to 
think and teach that credit might answer all the pur- 
poses of money. It is certain' that it answers some 
of the purposes of money. Suppose A has bought 
of B $100 worth of goods, and B has bought of A 
$125 worth of another kind of goods. Three ways 
are open to close up these transactions. A may pay 
B and B may pay A in money. This would take 
|225. A may pay B in money, and B may send it 
back with $25 more. This would take $125. Or 
A and B may mutually balance books, and B pay 
the difference in account. This would take $25. It 
is clear, that, as one or other of these methods pre- 
vails in practice, the quantity of money required to 
do the business of a country is very different. So in 
international trade. Foreign bills of exchange lessen 
enormously the quantity of money that would other- 
wise have to be transported. Credit does take the 
place of money in part. Can it take the place of 
money entirely? I think not. 

We have defined credit as a right not yet realized. 
The denominations of money are certainly needful 
in order to measure this right; and I do not see how 
the denominations of money can be maintained at 
all separately from the use of money itself as a me- 
dium. Moreover, great as is the undoubted power 
of credit, it waits for something beyond itself; it 
waits for realization. I do not see how realization 
can come without the use of money, at least to set- 
tle balances. Further, there always have been hith- 
erto in all commercial countries longer or shorter 



ON CREDIT. 355 

periods during which there was a general reluctance 
to accept the ordinary instruments of credit in ex- 
change. Money, and much of it, was then found to 
be indispensable. The very advantages of credit it- 
self, which have now been explained, are dependent 
on this, that there be underneath it, to support and 
limit it, a solid basis of value-money, in whose de- 
nominations value can be reckoned, in whose coins 
the balances of credit can be struck, and whose pres- 
ence secured everywhere by natural laws alone can 
enable fulfillment to join hand in hand with promise. 
If ever credit should usurp the whole domain of 
money, a tolerable standard of value would be no 
longer possible, credit itself would lose its foothold, 
and the vast balloon of promise, sailing for a while 
through the blue, the joy of projectors and the won- 
der of credulous spectators, would descend on a 
sudden collapsed and ruined to the earth. 

This is the place to notice the much mooted ques- 
tion whether deposits are a part of the currency. It 
will have been observed that I have not used the 
word currency in these discussions in any technical 
sense. I do not accept the common distinction 
made between money and currency, namely, that 
the former is coin, and the latter the aggregate of the 
current forms of credit. Current usage of language 
in this country recognizes bank-notes as money 
equally with coins; and regards the possession of a 
generalized purchasing-power, by means of which 
something circulates among all classes of the people 
as a medium in their exchanges, as the sole charac- 
teristic of money. I think in this case language hits 
the mark. If so, deposits, though they may be cur- 



356 ELEMENTS OF POLITICAL ECONOMY. 

rency if one cares for the word, are not money. A 
deposit is as much the banker's promise tp pay as 
the banlc-note is, but the two promises are quite 
diverse in their action. The note passes from hand 
to hand indefinitely in payments, legally liquidates 
debts at once, and is likely enough not to return to 
the banker for years. A check, on the other hand, 
drawn on a deposit, though it may pass by indorse- 
ment through a number of hands, yet in practice 
rarely makes but one payment, is legally discrimi- 
nated from the bank-note, and comes back to the 
banker almost immediately. Checks are a useful 
form of credit, much less liable to abuse than bank- 
notes, but they lack that peculiar quality that consti- 
tutes anything to be money. Besides the two es- 
sential functions of banks, receiving deposits and 
discounting bills, they perform a variety of other 
legitimate operations in credit. They buy and sell 
debts of all sorts. They sell their own drafts on dis- 
tant places. Our new national banks have done an 
immense business in the national bonds. They have 
been instrumental in diffusing these bonds among 
the people. They collect for their customers the 
coupons at maturity. They are the factors of the 
government in exchanging, for those who desire it, 
one species of bond for another. For the most part, 
all these dealings of bankers in debts, — and their 
aggregate amount is enormous, — ^ must be enumer- 
ated among the advantages of credit. 

There are some natural disadvantages in credit. 
The first is, that when it is much given by dealers to 
consumers, the reverse results take place from those 
already characterized, and capital passes out from the 



ON CREDIT. 357 

bands of productive operators and becomes tempo- 
rarily unavailable as capital. When an industrious 
artisan or merchant has trusted out $1000 to dilatory 
customers for six months or a year, it is so much 
withdrawn for so long from his active capital, and to 
mal\e up the consequent loss of profit there must be 
an addition to the prices of his wares, and besides 
some bad debts belong to such a system, and there 
must be an additional price to compensate this, and 
thus the customers who pay promptly bear a part of 
the proper burden of the delinquents, who at least 
do not wholly escape, inasmuch as they ultimately 
(if they pay at all) pay a price enhanced by their 
own delay. If the current profit of capital be ten 
per cent., and the merchant sells and gets returns 
five times a year, something less than two per cent, 
profit may be charged to each article, but if he only 
gets returns at the end of the year, ten per cent, 
must be put upon everything. Hence the excellent 
maxim, " Quick sales and small profits." 

But the principal disadvantage of credit is seen in 
its action on prices through increased demand, and 
in its consequent tendency to produce commercial 
crises : and this chanter will be concluded by a pre- 
sentation of this subject, together with a brief dis- 
cussion of the proper method of dealing with the 
national debt of the United States. 

The cause of commercial crises is, in general, an 
undue expansion of credit; or, to use an equivalent 
expression, a disproportion between the amount of 
debts and the available capital in the loan-market, 
or elsewhere, to meet those debts. 

A man's whole purchasing-power is made up of 



358 ELEMENTS OF POUTICAL ECOXO.MV. 

three things: first, the property in his possession; 
secondly, the value that is owed to him ; thirdly, his 
credit. He can buy value with these three things ; 
and his power to buy is exactly measured by the sum 
of these three things. But while the first two are 
limited and ascertainable, the third, credit, is in a 
certain sense unlimited. Being based upon confi- 
dence, which is itself a variable quantity, a man's 
credit at one time may be vastly greater than at 
another, compared with his real property ; and, if he 
have the reputation of doing a safe and regular 
business, and is favored by circumstances, he will 
find himself sometimes able to buy on credit to an 
extent perfectly enormous compared with his capital. 
Instances are given of dealers, who, in times of 
speculation, have effected purchases to an extent 
seventy or even one hundred times greater than their 
capital. And on the other hand, in times of panic, 
men of known character and of financial solidity 
find it impossible to borrow a dollar. 

Now money acts upon prices only by being offered 
in exchange for commodities ; but we have seen that 
commodities may be purchased by credit as well as 
by money ; when, therefore, credit is offered and re- 
ceived for commodities, it has the same infiuence 
upon prices, as when money is offered and received 
for them. The form which the credit assumes to 
effect the purchase is a matter of indifference, whether 
bank-notes, checks, bills of exchange, or book-credits, 
what acts upon prices is the credit, in whatever shape 
given, or whether it gives rise to transferable paper 
or not. 

It follows from this, that whenever there is an ex- 



ON CREDIT. 359 

tension of credit for the purpose of purchasing, there 
will be a corresponding rise of prices. He who em- 
ploys both his cash and his credit in purchasing, 
creates a demand for the article to the full amount 
of his money and credit taken together, and raises 
the price proportionally to both. 

There might be a simultaneous rise of price in 
several commodities, and a considerable spirit of 
speculation manifested in these, if there were no such 
thing as credit and all business were done by ready 
money ; but there could not be a general rise of 
prices as to all commodities ; for, while men spent 
more money on the few commodities, and they rose 
in price, they would have less money to spend on 
other commodities, and these would not rise, but 
rather fall. It is only when credit can be used freely, 
and increased purchases can go on in ail departments 
at once, that there can be a rise of prices as to all 
commodities, and a universal spirit of speculation. 

At such times, and while prices are still rising, 
men'seem to be making great gains ; those that sell 
while the fever is on do make great gains ; and they 
not only use their credit freely, but they really have 
more credit to use, from the very fact the^ seem to 
be prosperous. Everybody wishes to extend his 
operations to the utmost limit, in order to realize the 
greatest possible gains. Everybody wishes to use 
not only all his money, but all his credit. Every- 
body desires accommodation, and accordingly every- 
body gives accommodation. All forms of indebted- 
ness are greatly increased. Promissory-notes, bills 
of exchange, book-credits, are indefinitely multiplied 
in all directions. 



360 ELEMENTS OF POLITICAL ECONOMY. 

It begins now to be perceived in certain quarters, 
that the thing has been overdone ; speculative pur- 
chases cease ; prices begin to fall ; holders of com- 
modities are anxious to sell ; this very anxiety makes 
the price decline still further ; holders rush into the 
market to avoid a still greater loss ; and, as nobody 
wishes to buy when a market is falling, prices go 
down, down, down. Their inflated wealth collapses 
in the hands of the holders ; a panic often sets in, 
more unreasonable, if possible, than the previous over- 
confidence. Men must realize something from their 
property ; they sell it therefore, frequently, at almost 
any sacrifice ; but the small amounts of money thus 
realized, and all the loans which can be extorted for 
enormous rates of interest, now when credit is almost 
destroyed, are totally inadequate to meet the immense 
mass of debts contracted when confidence was high. 
Property for which a man gave his note for $10,000 
is now worth but $1000, but that fact does not an- 
nihilate his debt, or erase his name from the unlucky 
paper ; he is still bound for the $10,000. An*d as 
the mass of paper, greatly augmented during the 
period of excitement, comes to maturity, how can it 
be met ? It cannot be met. There is not disposable 
capital enough in the loan-market to meet it, even if 
it could be made available. But those who have 
capital hold on to it. They do not know whom to 
trust. Everybody seems to be losing, and many are 
failing all around them, and they will not loan. 
Those men therefore who have these debts to meet 
have no resource. They could borrow indefinitely a 
few months before, but now they cannot borrow a 
dollar. They besiege the banks with which they 



ON CREDIT. 361 

deal, sometimes piteously, and sometimes bitterly, 
for accommodation. But the banks cannot help 
them. These men must fail. There is no help for 
it. Thousands do fail in every revulsion. Distress, 
more or less extensive, is the invariable consequent 
of the series of events called a commercial crisis. 
That series is constituted somewhat in this manner: 
first, business a little brisk ; second, confidence and 
credit enlarging; third, a spirit of speculation; fourth, 
a vast increase of all forms of debt ; fifth, the revul- 
sion, or what may be called the cascade of discredit; 
sixth, stagnation and distress. 

A national debt is a mortgage upon the national 
property and income. It is sometimes considered as 
a blessing, but is more generally and truthfully re- 
garded as a burden. It is not denied that incidental 
advantages may spring up in connection with it. 
The bonds, which are the evidences of the debt, open 
a convenient form of investment for presently inact- 
ive capital and for trust-funds of all kinds. There 
can be no doubt, I think, that certain classes of per- 
sons holding these national obligations are won to a 
stronger loyalty and become firmer friends to stabil- 
ity in government-; but this consideration applies 
mainly to new governments, and to those tempo- 
rarily endangered. Both England and the United 
States now make a portion of their public debt the 
basis of a national system of banking; but it is very 
questionable whether this can be mentioned among 
the incidental benefits of the debt. Again, " a mod- 
erate debt adds to the credit of a nation, and its abil- 
ity to raise money in an emergency, for bankers and 



362 ELEMENTS OF POLITICAL ECONOMY. 

capitalists are more ready to take such securities as 
they are in the habit of dealing in." ^ 

The burdens of a national debt are very apparent. 
During the fiscal year closing June 30, 1867, the 
United States paid out in interest $143,781,592 •, 
and between the 1st September, 1865, and the 1st 
November, 1867, it paid towards the principal of 
the debt $266,185,121. These vast sums came out 
of the industry and income of individuals. They 
came through taxation of individual proprietors oT 
value ; and taxation to any such degree as this is a 
great disturbance to industry, and gives rise to an 
army of officials who consume a considerable per- 
cenitage of all they collect. The collection of the 
internal revenue for the fiscal year 1867 cost $7,712,- 
089. Moreover, the various expedients of taxation, 
which are always practically unequal in their opera- 
tion, give rise to irritation and political agitation, and 
even sometimes to threats of repudiation, especially 
when the occasion has gone by under which the debt 
was contracted, and a generation is called upon to 
liquidate a debt which it had no agency in creating. 

And here the vexed question arises, how far one 
generation has a right to throw upon succeeding 
ones the burdens of a national debt? I answer, that 
it has a very limited right indeed. The opposite 
doctrine tacitly implies that succeeding generations 
will have no occasion for extraordinary expenses 
of their own, and therefore may rightfully be made 
to contribute to the extraordinary expenses of this 
generation. But it is pure assumption to take for 
granted that the next generations will not have, of 

1 Communication from Sidney Homer. 



ON CREDIT. 863 

some kind or other, as much occasion for an extraor- 
dinary effort in the way of defence or of improve- 
ment as the present generation has had. It is an 
illusion to estimate what has now to be done as of 
much more importance than what will have to be 
done. Therefore to throw our burden forward on 
another generation that may have its own peculiar 
effort to make, just as great and just as imperatively 
called for, is an unwarrantable procedure. The view 
that has prevailed in practice, that a great war-debt, 
for example, might be cast with facility upon pos- 
terity, has given rise to needless and expensive wars ; 
and they have been called upon to pay who perceive 
the utter inutility of the expenditure. Thus bitter- 
ness has been added to burden. Besides, it will be 
found to have been commonly true, that each genera- 
tion has been able of itself to meet the cost of what- 
ever the providence of God has fairly called upon it 
to do. Sufficient unto the day is the evil thereof: 
conversely, the day thereof is sufficient for its own 
evil. The present generation of American citizens 
has been called on to do a great and necessary thing 
in suppressing a civil war, and in eradicating a social 
institution that was thoroughly bad. The expense 
of doing this has been enhanced by timid counsels 
in the field, by class-legislation in Congress, and by 
bad financiering in the Cabinet ; but the debt, vast 
as it is, and unnecessarily incurred as a portion of it 
was, can all be paid off, must all be paid off, by the 
generation that incurred it. 

How can this desirable result be best reached ? 
-First of all ought the United States legal-tender 
notes to be called in and cancelled. They are a por- 



364 ELEMENTS OF POLITICAL ECONOMY. 

tion of the unfunded debt, and no interest accrues 
upon them, but they have been mischievous and 
wasteful in their effects upon industry and business. 
Their introduction would not have been so harmful, 
if, contemporaneously with it, Congress had forbid- 
den the further circulation of State bank bills. These 
latter were largely increased along with large issues 
of the national notes. The currency became thor- 
oughly debauched. The measure of value became 
as variable as the drift of the winds. Prices became 
universally and abnormally high. Business became 
feverish, and speculation rife. When, after a long 
interval, the State bank bills were retired under a 
heavy tax, the national bank bills were ready to take 
th«ir place, and these, together with the legal-tender 
notes and fractional money, now swell the volume 
of the currency to nearl^y seven hundred millions 
($700,000,000) of paper money, every dollar of it prac- 
tically irredeeniable, and every dollar of it depreciated 
(September 23d, 1868) thirty-one per centum. The 
country is suffering in every one of its leading inter- 
ests, domestic and foreign, from the influence of this 
inferior money. Trade is languishing; and the poor 
especially are experiencing the truth of the oft-quoted 
remark of Mr. Webster, that the most successful ex- 
pedient ever devised to cheat the laboring classes of 
mankind is irredeemable paper money. Let, then, 
the national legal -tender notes be steadily witli- 
drawn. They have cheated creditors, and relieved 
debtors of their just obligations. They have made 
it impossible for other forms of value-money to come 
into circulation. Their presence in the currency de- 
preciates the value of the national bank bills, and 



ON CREDIT. 365 

puts off the day of specie payments. Let their career 
of mischief be concluded. 

In respect to the funded debt, we are paying the 
interest promptly, but not much reducing the princi- 
pal. Indeed, the vital question now is, not, How 
shall we pay off the bonds ? but, How shall we pay 
off the greenbacks ? The bonds are not due yet for 
many years, but the legal tenders have already been 
due many years, and the government still dishonors 
is own promises to pay. To pay in gold is the only 
meaning of a promise to pay dollars. A dollar is 
25j grains of gold, standard fine. It is beyond the 
power of government to make a dollar out of any- 
thing else than gold. It gave up, long ago, the 
attempt to make a dollar even out of silver. Green- 
backs are promises to pay these dollars ; and govern- 
ment is every day culpable while it does not take 
efficient measures to redeem these promises. Once 
in position to redeem these pressing promises, and 
the question now agitating the country about paying 
off a part of the bonds in paper answers itself. How 
can a promise to pay be the same thing as the pay 
itself? And how can a nation pretend to fulfill one 
set of promises by compelling its holders to accept 
another set of promises ? The only proper basis of 
a promise is the free trust of the receiver in the good 
faith of .the promisor. To compel men to accept a 
promise is a monstrous incongruity. To make the 
greenbacks a legal tender was bad enough ; to pay 
off the bonds with them would be enough worse. 
No ! The greenbacks must first pe paid in gold to 
every man who demands gold on them ; this is abso- 
lutely necessary to national good faith ; and then the 



366 ELEMENTS OF POLITICAL ECONOMY. 

bonds, if the principal be paid at all, which is not 
absolutely necessary to national good faith, since the 
terminable bonds may be changed into Consols with 
the consent of the holders, must be paid in gold to 
the last farthing. 

The price of the bonds, since they bear gold inter- 
est, has always been higher than the price of the 
greenbacks, in gold. Still, the bonds have not been, 
and are not now, at par. In the quotations Septem- 
ber 23, 1868, our best national securities stand at 
114. But this 114 is 114 in a paper money depre- 
ciated thirty-one per cent. ; that is, the bonds are 
worth eighty cents on the dollar. The ten-forty five 
per cents are quoted at 104, that is to say, at seventy- 
three cents on the dollar. The government itself 
realized from the original sale of most of these bonds 
much lower figures in gold value than even these. 
On the whole, the value of the evidences of the pub- 
lic debt is appreciating. 

The debt itself is something over $2,500,000,000. 
The English debt is a trifle less than $4,000,000,000, 
much of it in the form of Consols, whose peculiarity 
is, that they never fall due, so as to be a claim for 
the principal against the government; but are, after 
a day fixed, always redeemable at the will of govern- 
ment at par. The ordinary price of Consols, which 
bear three per cent, interest, is about 94. The ad- 
vantages, to a government, of a debt always redeem- 
able, but never payable, are obvious at first sight. 
All our funded debt, on the other hand, is made pay- 
able on a day certain. That it may be so paid, in 
gold, will require an economical administration of 
government ; an avoidance of intervention in the 



ON" CREDIT. 367 

affairs of our neighbors, and of entangling alliances 
with foreigners ; a free commercial system, under 
which duties shall be adjusted only for the most pro- 
ductive revenue ; "and a constant and onerous home 
taxation. 



368 ELEMENTS OF POLITICAL ECONOMY. 



• CHAPTER Xm. 

ON FOREIGN TRADE. 

The principles which determine the question of 
foreign trade have been abeady unfolded in these 
pages. It is only because their application to the 
wider field of international exchanges has been con- 
tested by some persons, w^hile conceding their valid- 
ity within the boundaries of the individual nations, 
that it is now needful to bestow upon the subject a 
separate treatment, to demonstrate that the laws 
of exchange are universal and not partial, and to 
attempt to answer with candor and thoroughness the 
objections that have been raised to the conclusions 
established by the almost unbroken unanimity of 
political economists who have written during the last 
hundred years. Here, as everywhere else within the 
science, the safe appeal lies to the common sense of 
men. A writer whose simple object is to reach the 
truth, and who has no interest, real or supposed, in 
defending or overthrowing a dogma, will not confuse 
the understanding of his readers, and his own, by 
leaping at once into the most complicated phenom- 
ena which the domain of exchange exposes to the 
observation of an intelligent science. He will take 
the simplest cases first, will display familiarly the 
principles applicable to them, and then with the clue 
well in hand, will pass on, and can be followed 



ON FOREIGN TRADE. 869 

through the most intricate portions of the subject. It 
is not owing so much to any inherent difficulties of 
the subject-matter, that the question of foreign trade 
has been the vexed question of the late centuries, as 
it has been owing to a false method pursued in dis- 
cussing it; a method which, however favorable to 
the apparent establishment of current maxims, and 
however approved by men of interested views, can 
never be made useful in the investigation of truth. 
It may be considered as a point already well settled 
by experience, that no man's sagacity is sufficient to 
guide himself or others to any sound conclusions on 
this field, who takes his stand at the outset amid the 
whirl of interlocking phenomena, and then endeavors 
to work himself out through the entangling meshes 
which surround him at every step. Happily, there is 
no need of any such procedure. Man is man, motive 
is motive, and exchange is exchange ; and the ap- 
parent chaos of commerce can be resolved through 
these alone into harmony and order. 

In our fourth chapter it was put, I believe, beyond 
the reach of controversy or cavil, that the only reason 
why men ever exchange services at all, is on the 
ground of a relative superiority at different points. 
This relative superiority at different points was 
shown to depend in individuals partly on natural 
gifts, partly on concentration of mind, or muscle, or 
both, on a single class of efforts, and partly on the 
use and familiarity in the use of the gratuitous helps 
of Nature aiding that class of efforts. The tailor 
makes the blacksmith's coat, and the blacksmith 
shoes the tailor's horse, for no other reason in the 
world, except that each has a relative advantage of 

24 



370 ELEMENTS OF POLITICAL ECONOMY. 

the other in his own work, and therefore there is a 
mutual gain in their exchanging works. To pretend 
that there would be any exchange between them, in 
case the blacksmith could make coats as well as the 
tailor, and the tailor shoe horses as well as the black- 
smith, would be to assert that man acts without a 
motive, and that exchanges take place without a 
gain. It was also shown in the same connection, 
that the greater the difference of relative advantage, 
the greater the gain of an exchange, because each 
purchases the service of the other at the rate of his 
own highest efficiency. To recur to the same ex- 
ample, while the efficiency of the tailor and the 
blacksmith each in his own trade remained at 6, the 
efficiency of each in the trade of the other being at 
5, there was only a gain of 2 to be divided between 
them ; but when by concentration and application 
the efficiency of each in his own trade rose to 15, his 
efficiency in the other remaining at 5, there was a 
gain of 20 to be divided between them. When the 
relative superiority of each over the other in his own 
trade was low, the gain, though sufficient to justify 
the exchange, was small ; but when the difference of 
relative advantage increased, just in that ratio did the 
exchange become more profitable to both. The obvi- 
ous inference from this, then drawn, and now re- 
peated, is, that every person who exchanges with 
others is directly interested in the highest efficiency 
and success of their efforts as well as his own. The 
diversity of relative' advantage at different points 
exhibited by different nations, and consequetuly the 
gains of international exchange, were expressly re- 
served at that point to a later stage of our inquiry. 
That stas;e is now reached. 



ON FOREIGN TRADE. 371 

The various countries of the earth have received 
from the hands of God a diversity of original gifts, 
in climate, soil, natural productions, position, and 
opportunity. This diversity exists for a good de- 
sign, and can never be substantially reduced by man, 
even if there were, as there is not, any good reason 
for desiring to reduce it. Besides original diversity 
in these respects, there has been developed in the 
history of the inhabitants of these countries, a diver- 
sity of tastes, aptitudes, habits, strength, intelligence, 
and skill to avail themselves of the forces of Nature 
around them. These differences are somewhat less 
inherent and more flexible than the others, but they 
exist, and always have existed, and in a greater or 
less degree always will exist ; and it is on these diver- 
sities, original, traditional, and acquired, that inter- 
national commerce depends ; it never would have 
come into existence without them, and it would 
cease instantly and completely were they to fade 
out. Men do not engage in foreign trade for fun; 
they engage in it for the sake of the mutual gain 
derivable to both parties ; they desist from it so soon 
as that mutual gain disappears ; and there is no 
mutual gain in any series of exchanges, unless each 
party has a superior power in producing that which 
is rendered, compared with his power in producing 
that which is received. "We will suppose a trade 
between England and France in cottons and silks, 
England sending cottons to France, and France 
sending silks in return. When and how long will 
this be a profitable trade ? Then, when efforts be- 
stowed in France upon silks will procure, through 
exchange with England, more of cottons than the 



372 ELExMENTS OF POLITICAL ECONOMY. 

same amount of efforts bestowed in France upon 
cottons will produce of cottons directly ; and then, 
when efforts bestowed upon cottons in England will 
procure more of silks, through exchange with France, 
than the same amount of efforts bestowed in Eng- 
land upon silks will produce of silks directly. So 
long as there is a difference of relative efficiency in 
the production of the two commodities in the two 
countries, so long, setting cost of carriage aside, may 
there be a profitable exchange of the two. To make 
such an exchange profitable to both parties, it is not 
at all needful that the cottons exchanged for the silks 
shall have cost the English as many days' labor as 
the silks may have cost the French ; or that the silks 
shall cost the French as much as the cottons cost the 
English ; it is not a question of the absolute cost of 
either commodity to the parties producing it ; but a 
question of the relative cost of that produced in 
either country compared with what would be the 
cost of the other commodity were it to be produced 
in that country. The question for the Frenchman 
is, Can I get more cottons by working on silks 
for a month, and then trading with England, than I 
can get by a month's work on cottons at home ? And 
the question for the Englishman is. Can I get more 
silks by making cottons, and then trading with 
France, than I can get by trying to make silks at 
home? As this point is fundamental, and deter- 
mines the whole matter of foreign trade, it shall be 
illustrated arithmetically. Suppose that cottons 
costing $100 in England exchange for silks costing 
$80 in France : is that a losing trade for England ? 
Not necessarily. Is it a remunerative trade for 



ON FOREIGN TRADE. 873 

France ? Not necessarily. It depends simply upon 
this : whether $100 expended in England in the 
manufacture of silks will produce as many and as 
good silks as can be obtained for $100 by exchange 
with France ? If it will, depend on it, that $100 
will never go to France to buy silks. If it will not, 
and silks are in demand in England, then, clearly, 
the trade is advantageous to the Englishman. If 
the cottons costing $100 in England, and obtained in 
exchange for silks which cost but $80 in France, can 
there and then be made for $75, France makes a 
losing trade (but only by supposition), though she 
gets what cost $100 for <vhat cost but $80. My 
readers will perceive, that it is not the absolute cost 
of commodities to the countries producing them that 
determines their value in foreign trade, but that cost 
relatively to what would be the cost of the return 
commodities were they to be grown or manufactured 
there. A demand in each country for the product 
of the other is of course presupposed in the illustra- 
tion. 

If this general representation be just, and I think 
every thoughtful person will concede it, then it fol- 
lows, that, setting aside a greater cost of carriage, 
foreign trade presents no elements peculiar to itself, 
but only the same elements which domestic trade 
presents; and consequently, that the same laws and 
limitations applicable to domestic exchanges are ap- 
plicable also to foreign exchanges. As in every other 
exchange, so here, there are two efforts, represented 
in this case by the cost of the respective commodi- 
ties, — the cottons $100, and the silks $80 ; there are 
two desires, — the desire of the Englishman for silks, 



374 ELEMENTS OF POLITICAL ECONOMY. 

and of the Frenchman for cottons ; there are two 
estimations, — the estimation of the Frenchman of 
the effort in silks required to obtain the cottons by 
exchange compared with the effort required to obtain 
them directly, and the Englishman's estimation of 
his effort in cottons necessary to procure the sillts in 
exchange, compared with what would be the effort 
needed to manufacture the silks in England; and, 
finally, as always, two satisfactions. 

Now let us further suppose that while the cottons 
cost $100 in England, it would cost $120 to manu- 
facture there as good silks as can be made in France 
for |80 ; and that while the silks cost but $80 in 
France, it would cost $96 to make cottons there as 
good as the English can make for $100. On this 
supposition, France can make both silks and cottons 
at a cheaper absolute cost than England can. But 
does that destroy the motive and the gain of an ex- 
change between the countries in these two articles ? 
Let us see. By exchange with England, France 
gets for $80 in silks, cottons which would otherwise 
cost her $96, — a handsome gain of 20 per cent. ; 
England gets for cottons costing her $100 silks 
which would otherwise have cost her $120, — another 
handsome gain of 20 per cent. Though France can 
make each commodity for less absolute money than 
England can make either, there is a diversity of rela- 
tive advantage, and therefore there might be in this 
case, as there is actually in many such cases, a prof- 
itable trade. The efficiency of France in making 
silks, relatively to that of England in making silks, 
is in the ratio of 80 to 120, — a difference of 50 per 
cent. ; while the efficiency of France in making 



ON FOEEIGN TRADE. 375 

cottons, relatively to that of England in making the 
same, is only in the ratio of 96 to 100, — a difference 
of 41 per cent. In the majority of cases, doubtless, 
foreign trade takes place in articles, in the production 
of one of which each of the respective countries has 
an absolute advantage over the other, but an every 
way advantageous trade may be earned on in articles 
in the production of both of which one nation shall 
have an absolute superiority over the other, proVided 
only that this superiority be relatively diverse in the 
two articles, as has just been shown. This is an 
effectual answer, as I take it, to the clamor of some, 
who object to importing articles which might be 
made at home for the same sum of money as for- 
eigners expend in making them ; admitted, that they 
might be so made; does it follow that the country 
importing them would get them as cheaply by 
making them itself ? By no means does that follow. 
By the supposition, the importing country has an 
efficiency in making those articles equal to that of 
the foreign country ; but it may also have a superi- 
ority absolute or relative over that country in the 
production of other articles which that country wants 
in exchange ; if so, the exchange complained of may 
go on to the manifest profit of both parties. Our 
general supposition a little changed will put this case 
in its true light : France can make cottons for $100 
which it costs England also $100 to make ; shall she 
give up her trade with England in silks and cottons, 
because she can make cottons as cheap as England 
can ? She had better not. Let the exchange go on ; 
for $80 in silks she gets cottons which would other- 
wise cost her $100, — a gain of 25 per cent. ; Eng- 



376 ELEMENTS OF POLITICAL ECONOMY. 

land gets silks for |100 which would otherwise cost 
her $120, — a gain of 20 per cent, as before. Let no 
nation be in haste then to drop a trade, because it 
thinks it can make the article received in exchange 
as cheaply as the other nation makes it, so long as it 
has an advantage over the other, absolute or relative, 
in making the article rendered in exchange ; and when 
that advantage ceases, the trade will drop of itself. 

What will be the extreme limits of the value of 
cottons and silks in a trade between England and 
France under the conditions supposed ? And when 
will a third nation be able to undersell either in 
the ports of the other? The extreme value of 
French silks in English cottons, will be 80 and 96 ; 
they cannot fall below 80, because they cost the 
French that to produce them ; they cannot rise 
above 96, because at that rate the French can make 
cottons, and there would be no gain in exchanging. 
Nations, no more than individuals, will get them- 
selves served at a greater effort than that at which 
they can serve themselves. If a given effort does 
not realize more through exchange than it would 
directly, then the exchange ceases of necessity, as 
fire goes out for lack of fuel. The extreme limits of 
the value of English cottons in French silks, will be 
100 and 120, for reasons precisely similar. There- 
fore the highest profits possible to both nations, 
under the conditions of the trade, are 20 per cent, 
each. France would be glad to take the cottons at 
a return of 80, at which rate her gain would be 20 
per cent. ; and she cannot under any circumstances 
offer quite 96, at which rate her gain would disap- 
pear. No third nation, therefore, in a trade of silks 



ON FOREIGN TRADE. 377 

for cottons, can expel the French from the English 
ports, until it is prepared to offer nearly 96, or 
more, in silks in retm'n for English cottons ; that 
is to say, until its efficiency in making silks rel- 
atively to that of England in making them, presents 
a greater difference than the difference of efficiency 
between France and England in making silks, that 
is, greater than fifty per cent. A greater difference 
of relative advantage, and nothing else, will enable 
a third nation to undersell France in such a trade. 
England would be glad to take the silks at a return 
of 100, at which rate her gain is 20 per cent. ; and 
she cannot possibly offer quite 120, because at that 
rate her gain would wholly vanish. She could be 
undersold in the French ports, under similar condi- 
tions, and not otherwise, as the French in her own 
ports, as just now indicated. We have seen that 
the diversity of relative advantage in the production 
of the two articles in the two countries is in the 
ratio of 50 to 4^ ; France has an absolute advantage 
in the production of both commodities ; the trade 
proceeds simply on the basis of this relative diver- 
sity ; and no nation can take away the silks of 
France from England, or the cottons of England 
from the French, either with other cottons and silks, 
or any other commodity, except on the basis of a di- 
versity, absolute or relative, greater than this Here 
is the whole doctrine of one nation's underselling an- 
other in the ports of a third. It can do so under condi- 
tions of greater relative efficiency, and not otiierwise. 
So far we have considered only their relative cost 
of production as determining the value of articles in 
foreign trade. But we know that the element of 



378 ELEMENTS OF POLITICAL ECONOMY. 

desires also helps to determine all value. We come 
now to illustrate what is sometimes and properly 
called " the Equation of International Demand." 

If the demand for French silks in England just 
answers to the demand for English cottons in France, 
so that the silks offered by France just pay for the 
cottons offered by England, then, cost of carriage 
aside, the gains of the trade will be equally divided 
between the two nations, each will realize 20 per 
cent, profit, because neither will have any motive to 
lower the value of its commodity below its highest 
value ; France, from its point of view, will offer 80 in 
silks and get 96 in cottons ; England, from her point, 
will offer 100 in cottons and get 120 in silks. Demand 
and supply are equalized at a point of value most 
favorable to both parties, and really determined by 
the relative cost of production. This case of equali- 
zation, though possible, is likely rarely to occur in 
practice. On any terms of exchange first offered, 
there is likely to be a stronger demand in one country 
for the product of the other than in this country for 
the product of that. This will lead to a change of 
value, and a new division of profits. The product 
for which the demand is less will find its market 
sluggish, and in order to tempt further and brisker 
exchanges, will be compelled to offer more favorable 
conditions. He who enters a market in quest of 
what is more in demand with a service in return 
which is less in demand, will have to lower his 
terms, or not trade. The equalization of supply and 
demand will only be reached in this case, by quicken- 
ing the demand for the commodity now less in 
demand, through an offer of better terms in trade. 



ON FOREIGN TRADE. 379 

Thus, if the demand for French silks in the English 
ports be slack, in comparison with the demand for 
English cottons in France, at the rate of exchange 
first established — 80 for 96, the French merchant has 
no resource, if he wishes to continue the trade, but to 
offer more silks for the same amount of cottons, say, 
85 for 96. If this reduction prove sufficient to can- 
cel the account in cottons with the account in silks, 
then the trade will go on on this new basis for a 
while, the equalization of supply and demand has 
been reached through a new valuation of the com- 
modities, and there is now a different division of the 
profits. France gains now only 13 per cent, by her 
trade with England, while England gains 27^ per 
cent, in her trade with France. Under these new 
terms of exchange, it is possible that silks may again 
become heavy in reference to cottons, and a new de- 
cline take place in their relative value. If the French 
are obliged to offer 90 for 96, in order to obtain the 
cottons they want, their profits will sink to 5§ per 
cent., while the English profits will rise to 35 per 
cent. If, in any contingency, the French were com- 
pelled to offer in the neighborhood of 96 in silks for 
96 in cottons, the trade would cease of course, just 
as every, other transaction ceases when the motive 
for it ceases. Of course, the cottons are just as likely 
to become dull in reference to silks, as the silks to 
cottons, and in this case England must lower her 
demands, and thus surrender a larger share of the 
profits to France. By the play of supply and 
demand, within the outermost limits drav/n by the 
relative cost of production, is the value of articles 
determined in foreign trade ; and no degree of com- 



880 ELEMENTS OF POLITICAL ECONOMY. 

plication in the variety of articles, or in circuitous ex- 
changes, affects, for substance, these fundamental 
principles. For example, if, instead of one article, 
as cottons, England sends two articles, or ten, to 
France in payment for silks, she will send in prefer- 
ence that article in which her labor is relatively most 
efficient, so long- as the Frencl\ demand will receive 
it ; then, when obliged to lower on that down to the 
point at which her next most available article stands, 
she will send that in quantities regulated by the 
demand for it; and so on to the end. No matter 
whether the articles be one or many; no matter 
whether the trade be a direct, or an indirect, trade ; 
the profits in all cases will depend, first upon the 
ratio of the cost of what is rendered to what would 
otherwise be the cost of that received ; and secondly, 
upon the relative intensity of the two demands. The 
greater the relative efficiency of any nation in pro- 
ducing an article of' export, and the stronger the 
demand for that article in foreign ports, the more 
profitable does the trade become to that nation. 
The precious metals, whether produced at home, or 
obtained from other nations by another series of ex- 
changes, stand here in the same relations as other 
commodities, and are frequently the most profitable 
articles that a nation can export. The terms of in- 
ternational exchang'es, then, between any two na- 
tions, are so adjusted, as to equalize the demand for 
their respective products, and cancel the debts mutu- 
ally incurred. 

It follows from all this by a necessary inference, 
that what a nation purchases by its exports, it pur- 
chases by its most efficient labor, and consequently 



1 



ON FOREIGN TRADE. 381 

at the cheapest possible rate to itself. Only those 
things, for the procuring of which a nation possesses 
decided advantages relatively to other nations, and 
relatively to its own advantages in producing directly 
what is received in return, are ever exported ; and 
hence, the return cargoes, no matter what they have 
cost their original producers, are purchased by this 
nation as cheaply as if they had been produced by its 
own most advantageous labor. This is a wholly im- 
pregnable position, and the advocates of restricting 
foreign trade are challenged to try their hand a little 
at its defences. 

We see also, at this point, what to think of those 
people who deem it needful that each nation should 
be able to " compete " with other nations in every- 
thing. Why are not these people consistent enough 
to apply their favorite doctrine of "competing" to 
domestic exchanges also, and demand that the cler- 
gyman shall have facilities for "competing" with the 
lawyer, the tailor with the blacksmith, the farmer 
with the manufacturer, the publisher with the author? 
Will these people never learn that all exchanges, do- 
mestic as well as foreign, depend on relative supe- 
riority at different points, and that a nation which 
should try to make its success in production equal at 
all points, would be as foolish as an artisan trying to 
learn and practise all trades at once ? Suppose the 
nation to succeed, what then? It would supply its 
wants at a certain average efficiency of effort; whereas, 
by a thorough development of all its own peculiar 
resources, it could command by exchange the prod- 
ucts of the world at a cost not exceeding that of its 
own most productive and efficient exertion. In one 



382 ELEMENTS OF POLmCAL ECONOMY. 

word, whatever justifies individuals in selecting di- 
verse paths of production according to their capaci- 
ties and opportunity, the same justifies the nations 
in fully drawing out their own best capabilities under 
the conditions in which God has placed them, and 
then, exchanging what costs them little for what 
would otherwise cost them much, in enjoying all that 
the world offers at the least expenditure of irksome 
effort. Such action promotes the common good of 
all the nations, and makes the best of all accessible 
to all, and arms each with the power of all ; while 
the opposite action, by lessening the diversities of 
relative advantage, so far forth incapacitates all for 
exchanges which are at once profitable and stimu- 
lating. 

Closely connected with the one just cited, is an- 
other narrow and superficial notion, happily less 
prevalent now than formerly, namely, that new im- 
provements in machinery, or other enhanced facili- 
ties of production, realized in any nation, are a dis- 
advantage to other nations in their trade with that 
nation. Let us examine this point. Suppose France, 
by new methods of silk culture, to become able to 
make the silk which before cost $80 for $50, cottons 
in France, and silk and cottons in England, remain- 
ing in natural cost as before, does France alone gain 
the entire advantage of the increased cheapness of 
silk ? We will see. The production of silk in 
France is greatly quickened by the cheaper meth- 
ods, more is produced, more is carried to England to 
buy cottons with, but at the old rate of 80 for 96 
the English will not take any more silks, and the 
French, who can now abundantly afford it, since 



ON FOREIGN TRADE. 383 

their nominal 80 is really 50, will offer more silks 
for 96 in cottons, in order to tempt a brisker and 
broader sale. They offer, say, 96 in silks for 96 
in cottons, and if that reduction of value of silks in 
cottons be enough for the equalization of the re- 
spective demands, the trade will go on on that basis, 
at least for a time ; and as there is now a larger dif- 
ference of relative advantage than before, there will 
be, as always in such cases, larger profits to be 
divided between the two parties. The 96 now 
offered in silks to the English is really only 60 in 
cost to the French, so that the French gain in the 
trade is largely increased ; they now get for what 
costs them 60 what would otherwise cost them 96, 
a clear gain of 60 per cent. Before the new meth- 
ods of silk culture were introduced they gained 
only 20 per cent. But the English have also gained 
largely by the ingenuity and diligence of their neigh- 
bors. Before, they gained only 20 per cent, in the 
trade at best; now they get for what costs them 
$100 that which otherwise would cost them $144, 
a clear gain of 44 per cent. Indeed, it might easily 
happen, through the changes in international de- 
mand, that even a larger share of the benefit of 
the French improvements should accrue to the 
English than to the French themselves ; the share of 
the French all the while being large, and much lar- 
ger, than if, greedily endeavoring to keep all the ben- 
efit, they refused to trade at all. Thus we reach 
again, from another outlook, a grand doctrine of 
exchange, that each party is benefited by the prog- 
ress and prosperity of the other. The only way in 
which all nations can share in the benefits of the 



384 ELEMENTS OF POLITICAL ECONOMY. 

thrift and enterprise of each other, is through mutual 
international exchanges ; and when each nation sees 
to it that it has a few commodities at least for which 
there is a strong demand among foreigners, and in 
the production of which themselves have a strong 
superiority, it may rest assured that it buys all it 
buys from abroad, gold included, at the cheapest rate 
to itself, and shares a part of the prosperity of every 
nation with which it trades. 

It is now time to look at the cost of carriage, thus 
far allowed to sink out.of sight for the sake of greater 
simplicity of view. This is an important element in 
international exchanges, and one which must not be 
neglected, although Mr. Carey unduly enlarges upon 
it with a view to prejudice a free exchange. Cer- 
tainly, it costs something to carry any goods abroad, 
and to bring back a return, and we may be assured 
that if such return goods could be procured as cheaply 
without incurring such expense, the expense would 
never be incurred. The fact that all expenses con- 
nected with carriage are gladly borne by the mer- 
chants who carry on the trade, shows that the gains 
of the trade are so great as not only to pay freights 
and insurance, but also to leave a good margin for 
profits. Mr. Carey does not get around this stubborn 
fact. What use is it to pile up calculations to show 
that the expenses incurred in carriage, if applied to 
production at home, would secure as good goods and 
more of them ? If they would, why do they not? 
Have not men common sense ? Is not self interest a 
tolerably strong motive-power ? Is it needful to in- 
voke the mighty arm of law to compel men to act in 
accordance with their pecuniary interests ? Mr. 



ON FOREIGN TRADE. 385 

Carey would restrict foreign trade, because it cost3 
so much to carry on. Is that wise, provided the gains 
after all largely overbalance the cost ? If they did 
not overbalance it, would the trade go forward ? If 
the cost be large, as it is, that is a good reason to 
desire its reduction, if possible; to labor for increased 
facilities of transportation, for cheaper freights, and 
better rates of insurance ; but to argue for forcibly 
stopping a trade by legal enactment, because it costs 
those so much who freely undertake to carry it on, 
does not strike me, and, I believe, will not strike my 
readers, as a sound argument. Which nation, a 
party in foreign trade, pays the costs of carriage ? 
Or does each pay them in equal proportion ? The 
aggregate cost of transportation to the foreign mar- 
ket is so much added to the cost of production, and 
is a deduction of so much from what would other- 
wise be the whole gain of the exchange ; but it is 
not true that each party necessarily pays the whole 
of his own freights, and therefore, that the party 
carrying bulky articles is at a disadvantage compared 
with the other. He may or may not be at a disad- 
vantage. That will depend on the effect of the new 
expense, however divided, on the demand in the 
respective countries. Suppose, that in the outset 
England pays the whole cost of carrying cottons to 
France, and France the whole cost of sending the 
silks to England; but as cottons are many times 
more bulky than silks proportionably to value, a 
larger bill of freights would fall to England ; and 
cottons would therefore fall relatively to silks ; but 
cottons and silks both have risen absolutely, that is, 
with reference to a given effort, or with reference 

25 



386 ELEMENTS OF POLITICAL ECONOMY. 

to a money standard. Suppose that France, in- 
stead of 8U for 96, now has to give 82 for 96, and 
England, instead of 100 for 120 now has to give 
105 for 120. The French gain in the trade is re- 
duced by cost of carriage from 20 per cent, to nearly 
18, and the English gain from 20 per cent, to nearly 
14 ; but it is by no means certain that the trade 
would go on on these terms ; the enhanced price of 
silks might well deaden the demand for them in 
England, more than the relatively less enhanced 
price of cottons in France would affect the demand 
for them. Silks have risen in England 5 per cent., 
but cottons have risen in France only 2} per cent. ; 
it is therefore every way likely that thereafter the 
demand for cottons will be stronger than the de- 
mand for silks, and if so, the French will have to 
offer better terms, or, what is the same thing, be 
obliged to pay a part of the English freights ; so 
that there is nothing in the true state of the case 
to justify the conclusion jumped at by some people 
that they who carry heavy goods are at a disad- 
vantage compared with those who carry light goods. 
That will depend on the equation of international 
demand. Nothing in the nature of things hinders, 
that each party shall in effect pay the freights of 
the other, or one even really pay the freights of^ 
both. 

These, then, are the essential principles of foreign 
trade, brought out, it is hoped, as clearly and con- 
secutively as the relative and complicated nature 
of the transactions will allow ; and in the light of. 
these principles it is very clear that foreign trade is 
just as legitimate as domestic trade ; tha,tit rests on 



ON FOREIGN TRADE. 387 

the same ultimate principles in the constitution of 
man and in the providential arrangements of Nature ; 
that the profit of it is mutual to both parties, or it 
would never come into being, or, coming into being, 
would cease of itself; that to prohibit it, or restrict 
it, otherwise than in the interest of morals, health, or 
revenue, must find a justification, if at all, outside the 
pale of Political Economy ; that to say to any body 
of men who wish to render purely commercial ser- 
vices to foreigners, to receive back similar services in 
return, that such services shall neither be rendered 
nor received, is not only to destroy a certain gain, 
but also to interfere with a natural and inalienable 
right. 

Unfortunately, the old mercantile system, which 
was so wise as to believe that gold and silver were 
the only objects of real value, taught also, in coinci- 
dence with its fundamental belief, that foreign trade 
ought to be so regulated and restricted as to bring 
in the largest possible quantity of the precious met- 
als ; that each nation ought to sell much and buy 
little in order to grow rich ; that bounties ought to be 
given to exportejs to encourage them to sell, and 
prohibitions laid upon importers to prevent their buy- 
ing ; and that the introduction, through exchange 
with foreigners, of articles which might be produced 
at home, should be by all means prevented by law, 
no matter what advantages for producing them for- 
eigners might have, or what advantages the nation 
itself might have in producing that which the foreign- 
ers would be glad to take in exchange. The mer- 
cantile system as such, is long ago dead and buried, 
but it has left one of its progeny behind it, of no 



388 ELEMENTS OF POLITICAL ECONOMY. 

better birth than its parent, which has not yet found 
its predestined death and burial. This is the doc- 
trine sometimes euphoniously and courteously de- 
nominated Protection to Native Industry, a designa- 
tion however not in the least indicative of its real 
nature. This doctrine, now fairly expelled from 
England and Germany, still lingers feebly in some 
other parts of Europe, and, though steadily declining 
in the United States, is still strong enough here to 
control the present national legislation. It has been 
reinforced, of late years, by the very respectable 
authority of Mr. Carey, some Of whose points will be 
considered in the sequel; and by one or two other 
persons whose opinions are entitled to a respectful 
consideration ; and the prevalence of the doctrine in 
the popular mind, particularly in New England, is 
still such that I deem it useful to examine the topic 
at some length, preferring to do so in the way of 
replying to the main objections urged against the 
opposite doctrine of a free commerce, especially as 
Protection so called acts at present wholly on the 
defensive. Some of the objections are of a popular 
character, and I shall feel at liberty to subject them 
to a popular refutation ; while such as profess to be 
scientific, will, it is hoped, be met by a scientific 
method at least equal to their own. 

Let us see precisely what a tariff is. The origin 
of the word will throw light upon the thing. The 
southernmost point of the Peninsula of Spain, which 
juts down into the narrowest part of the Straits of 
Gibraltar, holds a town named Tarifa. Here, dur- 
ing the Moorish domination, a castle was built, and 
all vessels passing through the Straits were stopped 



ON FOREIGN TRADE. 389 

and compelled to pay duties at fixed rates ; whence 
the word tariff in English and other languages. It 
■ will be perceived at a glance that a tariff is only an- 
other name for a tax. It is the special form of tax 
which governmen s levy on goods brought in from 
other countries. It may be legitimately imposed for 
the sake of a revenue to support government ; it may 
be a species of robbery, or black-mail, as in the his- 
torical instance just cited ; or it may be levied for the 
sake of Protection, so called ; but for whatever pur- 
pose imposed, it is always and simply a tax on the 
exchange of goods. How anybody can intelligently 
suppose that a system of taxes can be so cunningly 
adjusted as to become a positive productive agent, a 
spur to the progress of society, they must explain 
who suppose so. I myself once supposed so ; but it 
was when I was in ignorance of the real nature and 
operation of such taxes. A careful study of the 
principles of this science, with a noting of the records 
of experience in this matter, has convinced me, as it 
has thousands of others, that Protective duties, so 
called, are nothing in the world but burdensome 
taxes laid upon industry ; that they always have 
been, and always will be, deeply detrimental to the 
true interests of society. The word " Protective," as 
applied to a tariff", is full of deception. A tariff" in 
its very nature is a restraint. 

The first main distinction to which I call atten- 
tion, is that between a protective tariff and a rev- 
enue tariff. Upon this point a great confusion 
exists in the common mind. It is not at all the 
doctrine of Free Trade that no duties shall be laid 



390 ELEMENTS OF POLITICAL ECONOMY. 

upon imported goods. Duties ought to be laid upon 
imported goods, because that is a convenient and 
unexceptionable mode of raising a part of the taxes 
by which government is supported. Very high du- 
ties may be properly laid upon luxuries that are 
imported, such as wines and plate, for example, 
because they who buy such things are able to pay 
liberally for the support of the government. Free 
Trade has nothing to object to any duties that are 
laid with a simple view to equitable taxation. A 
tariff for revenue, therefore, as a mode of taxing the 
people for the support of the government, a tariff 
honestly adjusted for that purpose, has nothing 
whatever in conflict with the broadest doctrine of 
Free Trade. England, for example, which has 
adopted a complete system of freedom in her for- 
eign commerce, still levies duties on imports, and 
will continue to do so, for purposes of revenue 
merely. S'he raises on the average about thirty- 
five per cent, of her aggregate revenue from this 
source. 

But the idea of a protective tariff is totally differ- 
ent. Here duties are laid upon foreign commodities, 
so high, as either to exclude them altogether, and 
thus give the domestic manufacturer or grower the 
complete monopoly of the home market; or, if the 
duty be not so high as to be entirely prohibitory, it 
is made high enough to raise the price of the for- 
eign article to the point at which the home manu- 
facturer is desirous of selling his own. The effect 
that is designed, and that actually follows, is to raise 
the price to all consumers, in order that a factitious 



ON FOREIGN TRADE. 391 

advantage may accrue to certain home manufac- 
turers. When most successful, the effect is to trans- 
fer money from the pockets of all consumers, to the 
pockets of a few manufacturers. I do not stop at 
this point to demonstrate the economical folly of 
this, my object now being to show the idea that 
always underlies protective duties. We have seen 
already in the first chapter, and shall recur to the 
subject in the next, how the doctrine of protecti'^n 
grew immediately out of the Mercantile System, cne 
so called " Balance of Trade." Restrictive duties 
have never been laid in any age or country except 
for the purpose of securing, either a more favorable 
" balance of trade," or else certain supposed advan- 
tages to home manufacturers or growers. 

Now, the interesting question arises, which has 
been much agitated in this country, whether these 
two ideas of revenue and protection, which are so 
distinct and apparently incompatible, can be com- 
bined together? Whether a revenue tariff can be so 
adjusted as to afford incidental protection? De- 
feated as a general theory, and no longer able to 
stand upon its own merits. Protection, in this coun- 
try, only asks the privilege of leaning upon revenue. 
It is conceded that Protection for Protection's sake 
is improper ; but it is claimed that there is no harm 
in having as much protection as may incidentally 
result from a tariff framed for revenue. This shows 
how the general doctrine of Protection has declined, 
and seeks at last a compromise with freedom. There 
is no sound basis for such compromise ; and why ? 
Because revenue is only received on those goods 



392 ELEMENTS OF POLITICAL ECONOMY. 

that come in, and protection is only secured when 
the goods are kept out. You get no revenue, except 
as you let the things in ; you get little protection 
except as you keep the things out. The two ideas 
are opposi'te and incompatible ; one cannot ration- 
ally combine them ; a revenue tariff with incidental 
protection is a solecism. But it may be said, that a 
moderate duty that shall lessen, but not prevent 
importation, will raise the price of the foreign arti- 
cle, and thus enable the home manufacturer to 
realize the same price. This is true. But just look 
at it. The government gets a revenue only on that 
part that is imported; the high price has to be paid 
upon all that is consumed. The government makes 
the people pay much, in order that the treasury may 
receive little. I think that that is no desirable way 
of raising a revenue. 

It follows, that the principles on which a revenue 
tariff should be framed are very different from those 
that should rule in protective tariffs. If the object 
be revenue, the duties should be low, so as not to 
discourage importation, or very sensibly increase 
prices. Low duties on all imports, except high- 
priced foreign luxuries, which are used only by 
the rich, and which may be taxed heavily without 
discouraging importation, will infallibly yield the 
largest aggregate revenue. The reason for this is, 
that society is like a pyramid standing on its broad- 
est base : each horizontal section of it is more ex- 
tended than the one above it. So in society : the 
number of those able to purchase an article at five 
dollars, is more than twice as numerous as those 
able to purchase it at ten ; and those who are able 



ON FOEEIGN TEADE. 393 

to buy it at one dollar are probably more than ten 
times as many as those who would buy it at five 
dollars. The official list of incomes for the year 
1864, in the Tenth District of Massachusetts, lies be- 
fore me, and selecting one town at random, I find in 
its list one income over $40,000, three over $30,000, 
seven over $20,000, nine over $10,000, thirteen over 
$5000, twenty-nine over $2000, and seventy-eight 
over $1000. A lower duty, therefore, on any article 
is likely to bring it within the reach of a much wider 
circle of consumers; and for many to pay a low duty 
is better for the revenue than for a few to pay a high 
duty. Of course, the exact limitations must be 
found out by experience ; but Alexander Hamilton 
long ago, in one of the papers of " The Federalist," 
called attention to the fact in this connection, that 
a large multiplier will not of itself make a large prod- 
uct. The multiplicand is also a factor. During the 
late high prices, I was told by a prominent mer- 
chant, that the people not only did not buy as much 
tea as formerly, but also that they did not spend 
as many dollars for tea as when the article was 
cheaper. 

As between foreign nations, an interesting experi- 
ment is now going forward under the treaty of com- 
merce between France and England. In 1861, this 
principle of low duties was embodied in the mutual 
tariffs of the two nations, and the results thus far 
have delighted the friends and confounded the ene- 
mies of a free commerce. Not only has the amount 
of commodities exchanged prodigiously increased, 
but the increase of the revenue for England on the 
imports from France for the first three months of the 



894 ELEMENTS OF POLITICAL ECONOMY. 

new system, over the* corresponding quarter of the 
previous year, was $1,430,000 ; and the increase for 
France on the imports from England for the same 
three months, $7,382,000. Thus do facts corrobo- 
rate principles, and make us sure that we stand upon 
the rock. 

(1,) I shall now attempt to answer some objec- 
tions. One of the most common of these has been, 
that Free Trade is a theory: "It is all very well 
in theory, but it will not work well in practice " ; as 
if there can be a good theory that works ill in prac- 
tice ! A theory that does not work well in practice 
is a bad theory. The way to tell whether a theory 
is good or bad is to test it by practice. Every- 
thing that is done at all, unless by mere chance, 
is done on some theory ; and it is certainly better 
that things should be done on a good theory 
than on a bad one. What makes a theory good ? 
Simply because it corresponds with ■ and explains 
the facts. Newton's theory of gravitation is a good 
theory on this ground, and no other. If a man ob- 
jects to any theory, let him bring facts, principles, 
any truth whatever, to disprove it, and he shall be 
welcome ; but do not let him delude himself and 
others by supposing that he can concede the theory 
to be good, and then safely denounce the practice. 
A theory is good because it is good in practice, and 
for no other reason. 

There have been so many unfounded theories 
broached on all subjects, that the term has fallen 
into some reproach, and it is for this reason that 
the charge is brought against Free Trade, of being a 
theory : but there is nothing in the world more 



ON FOREIGN TRADE. 395 

respectable than a good theory proved by solid argu- 
ments and verified by facts. I am prepared to show, 
however, that the charge of being a theory falls with 
far greater force against the doctrine of protection 
than against the doctrine of freedom. Free Trade 
can hardly be said to be a theory at all. It is the 
natural state of things. If you and I wish to ex- 
change commodities for our mutual benefit, there is 
no theory or doctrine in the premises; we exchange, 
and that is the whole of it. If a Massachusetts 
fisherman wishes to exchange his dried cod with' a 
West India sugar planter, and the trade is mutually 
beneficial, what theory is involved ? They exchange, 
each is richer than before, and that is the whole 
of it. 

If now some one steps in between you and me, 
or between the fisherman and the planter, and says, 
" You shall not trade ! " he is bound to tell the 
reason why. The burden lies upon him. Let him 
bring forward his theory of restriction, and justify 
it. Let us hear the arguments and see the grounds 
that justify the prohibition of an advantageous 
trade! You see the burden of proof lies upon the 
advocates of restriction. It is the advocates of re- 
striction that drag in a theory which interrupts the 
play of natural laws, — which says to men who wish 
to trade, " You shall not trade ! " Commerce is no 
game of strife, of fraud, of overreaching. Its ben- 
efits are reciprocal and mutual ; otherwise there 
would be no commerce. The freights of the navi- 
gating interest, and the gains of the merchants, are 
but a very small part of the benefits of commerce ; 
the variety of commodities and of comforts which 



396 ELEMENTS OF POLITICAL ECONOMY. 

every commercial nation enjoys, by exchanging. its 
own surplus products for the surplus products of its 
neighbors, is the substantial advantage of trade. 
When now this beneficial interchange is going for- 
ward, or, if the artificial barriers were thrown down, 
would be going forward, who is he that takes upon 
him to curtail and to prohibit it ? Who is he that 
thinks himself competent to manipulate the un- 
changing laws of trade ? 

It is conceded by everybody that a free exchange 
of commodities within the same country is highly 
beneficial: what makes it suddenly cease to be bene- 
ficial as between foreign countries? Does the mu- 
tual benefit of an exchange depend upon the accident 
that the parties to it are citizens or subjects of the 
same government? The south end of Vermont 
trades freely and advantageously with its neighbors 
across the line in Massachusetts ; is there any good 
reason why the north end of Vermont should not 
trade just as freely and advantageously with its 
neighbors across the line in Canada ? These are 
questions which the theory of protection, in my 
opinion, cannot satisfactorily answer. 

(2.) I pass to a second current objection, namely, 
that if we admit foreign goods freely, we thereby 
employ the labor of foreigners, and so far diminish 
the wages of our own laborers. Let us see if this 
is so. Foreign articles are certainly wrought by for- 
eign labor ; do we, then, by buying them employ 
foreign labor, to the prejudice of our own laborers? 
We are obliged to pay for everything we buy, — 
are we not ? In what do we pay ? Clearly, in the 
products of our own labor. We employ our own 



ON FOREIGN TRADE. 397 

laborers to produce the articles which we exchange 
for foreign articles. We pay for our imports by our 
exports. Our exports are created by home labor, 
and the only possible way for us to obtain the 
results of foreign toil, is to offer in exchange the 
results of domestic toil. A commercial nation, there- 
fore, not only does not, but it cannot employ foreign 
labor. The more it buys of foreigners, the more 
home labor it must employ to create the articles 
with which it pays for what it buys. We must 
remember that the exports, taking the years together, 
must and do balance the imports. Free Trade, 
therefore, can by no possibility discourage home 
labor, or diminish the wages of laborers; and, as a 
matter of fact, labor is best rewarded, other things 
being equal, in the freest commercial countries. 

I deem it important thoroughly to demolish this 
objection, for it has been considered the stronghold 
of the advocates of Protection. I admit that a pro- 
tective tariff may stimulate a certain branch of man- 
ufacture, may concentrate capital in it, may call 
laborers into it, and even for a time increase the 
wages of those laborers. But competition will very 
speedily reduce wages in* that department to the 
average level in other departments, and unless it 
can be shown that restriction increases the general 
wages-fund of a country, — that fund that is de- 
signed for the payment of labor, — it is in vain to 
claim that it can increase the general wages of labor. 
Capital and laborers may indeed be withdrawn from 
one employment to another by artificial stimulus, 
but is there any general gain in that ? While the 
one is stimulated, is not the other depressed? I 



398 ELEMENTS OF POLITICAL ECONOMY. 

have seen upon the ocean the wind blow up a wave, 
but I always noticed a depression behind it. The 
general level of the ocean is not raised, however 
high the waves rise. 

Now how can the free interchange of commodities 
lessen the demand for labor or the rewards of labor ? 
You are employing a hundred men. You wish to 
obtain a certain quantity of cutlery. Does it make 
any difference to you or to the wages of your men, 
whether you employ them directly, in making the 
cutlery, or in making buttons with which you can 
purchase the cutlery from abroad? If, by employ- 
ing them in making buttons you can purchase more 
and better cutlery, (and if you cannot, there is no 
temptation to an exchange,) is it not plain to reason 
that it is better for you, and that you can afford to 
pay them better wages, than if you employed their 
labor less effectively directly upon cutlery ? This is 
but an instance, but it involves the principle. There 
is, there can be no discouragement to domestic labor 
in the freest international exchanges. Every foreign 
purchase necessitates the employment of domestic 
labor to create that with which the purchase is 
made, thereby enlarging » the demand for laborers, 
and thus tending to increase their wages. The ten- 
dency of Free Trade is directly the reverse of that 
alleged in the objection ; because the varied objects 
of use and elegance offered to our desires by inter- 
national commerce, stimulate labor to create that 
with which to buy them. 

We know now how to answer those who say, that 
if we should trade freely, with England, for exam- 
ple, we should bring down wages in this country to 



ON FOEEIGN TRADE. 399 

the English standard. This is too hollow a bug- 
bear to frighten sensible people any longer. To say 
nothing of the principles just explained, and others 
equally conclusive, that combine to scout it, the 
facts in the case would seem to settle the whole 
question. We have traded with England for eighty 
years, largely, increasingly, and from 1846 to 1861, 
almost freely, and yet wages have not constantly de- 
clined in America, and never stood at a higher figure 
than when the Morrill Tariff was passed in 1861. 

(3.) Bat if the doctrine of Protection be so false, 
and have no single solid argument in its support, why 
have so many nations acted on it, so many great 
men, among others, Daniel Webster, believed in it ? 
This objection I am bound to notice, for it has had 
no small influence. To estimate its force rightly, 
two things must be remembered : first, that the doc- 
trine of protection is an inheritance from the remote 
past, an outgrowth from a confessedly false dogma, 
which, being then universally received and acted on 
by the nations, has given this, one of its corollaries, 
whatever validity custom and prescription can give ; 
and, secondly, that there has always been a rich and 
influential class of men in the commercial countries 
who have supposed that their interests were subserved 
by the practical application of the doctrine. In respect 
to Daniel Webster, the first great speeches which he 
made in Congress, speeches that foreshadowed his 
great fame, were delivered in 1814. These indicate, 
as any one may read in Benton's Debates, Vol. V., a 
strong hostility to commercial restrictions of all kinds. 
He opposed, and New England with him, the protect- 
ive tariff of 1816. His speech of 1824, in opposi- 



400 ELEMENTS OF POLITICAL ECONOMY. 

tion to the higher rates proposed in the tariff of that 
year, is in reality one of the best free-trade argu- 
ments ever made. If he left, four years afterwards, 
this high ground of truth and principle, to occupy 
the lower ground of what he deemed expedient, it 
was owing to political stress of weather, to a change 
of policy on the part of Mr. Calhoun and other south- 
ern statesmen, to a supposed necessity of fostering 
manufactures on which New England under facti- 
tious inducements had embarked on a large scale. 
Mr. Webster never justified restriction as a principle; 
his commercial instincts were too strong for that; he 
always attempted to justify his course by peculiar 
and factitious circumstances ; almost half of his 
congressionjal life had passed away, before he could 
be brought to vote for levying high duties; and al- 
though he afterwards brought forward, in defence of 
the position thus assumed, arguments which Politi- 
cal Economy pronounces unsound, and although 
there doubtless mingled in with his motives a desire 
to gratify powerful constituents and friends who 
were directly interested in high duties, there is abun- 
dant reason to believe that his defection from sound 
principles was never so radical as has been com- 
monly supposed. 

It is not difficult to see why. there have always 
been so many advocates of the system of restriction. 
It is an old system. It is a system some of the argu- 
ments for which are superficially plausible. Above 
all, it is a system which many enterprising and pros- 
perous men have considered as essential to their 
pecuniary interests ; and when such men demand a 



ON FOREIGN TRADE. 401 

champion, eloquence and arguments are never long 
wanting. As a matter of fact, the legislation of 
the world has been largely controlled by such men, 
and that too, not always in the interest of the 
masses. It is more than doubtful whether man- 
ufacturers as a whole class have ever been perma- 
nently benefited by protective duties, or rather, it is 
certain that they have not been ; but they have sup- 
posed that they were, and some of them have been, 
prodigiously benefited ; and they have acted, and are 
acting, on that supposition, and the power of such 
men over public opinion is very considerable. As a 
class, they are intelligent and rich, and can easily 
combine to influence opinion and legislation. But 
even if they were benefited, as a whole, by protective 
duties, what sort of justice is it to take money out 
of my pocket and put it into theirs ? I object to that. 
My mickle, and your mickle, and our neighbor's 
mickle will make a very pretty muckle, — a small 
tax on all consumers of protected goods will reach a 
very handsome sum; but what valid claim can the 
manufacturers lay to it ? They are a very deserving 
class, and consequently prosperous ; but it may be 
respectfully submitted that they do not need unequal 
legislation in their behalf. They are not a needy gen- 
eration, but are well to do. The list of incomes on 
which a United States tax is paid, now annually pub- 
lished throughout the country, puts this fact beyond 
the shadow of question. In most sections of New 
England, they are the only men of large incomes. 
Now, it is no objection to these excellent men that 
they are rich, and getting richer ; they are rather 
deserving of all honor for their enterprise and vigor 

26 



402 ELEMENTS OF POLITICAL ECONOMY. 

and success ; but it is conclusive on this point, that 
they no longer need, even if they ever needed, any 
special protection from the government. Let them 
stand on the same level of advantage with other men, 
let them enjoy no unequal privileges, and everybody 
will rejoice in their prosperity. At. present, they 
occupy a false position, fatal to their own genuine 
self-respect, and to the hearty congratulations of their 
fellow-citizens. By far the larger part of the indus- 
trial interests of the country have no special protec- 
tion at the hands of government; and is it possible 
that these shrewd and able men who own and run 
mills and foundries, are willing to acknowledge that 
they alone of all the citizens are unable to render 
valuable and remunerative services to society with- 
out an artificial and governmental prop at their 
back ? 

(4.) This brings us to another objection, namely, 
that,'w^ere it not for protective duties, our manufac- 
tures would collapse, or as it is sometimes phrased, 
other nations would take all our manufacturing away 
from us. The first thing to be said about this is, 
that we do not manufacture for the sake of manu- 
facturing, but for the sake of the product, — it is not 
the process that we care about, but the product; 
and even if it could be shown, as it cannot, that free 
trade would lessen the manufacturing, that would 
not be so deplorable, provided we obtained by it for 
the satisfaction of our wants as many or more man- 
ufactured products. Satisfactions, and not efforts, 
are ultimate in the field of exchange. In the second 
place, it is needful to look at the meaning of the 
word, manufactures. So far, I have used it in the 



ON FOREIGN TRADE. 403 

loose popular way by which it has come to mean 
practically in this country the processes by which 
cotton, wool, and iron, are rendered available for 
various human uses. These more prominent inter- 
ests are currently meant under the terms manufac- 
tures and manufacturers ; but of course the terms 
properly include a wide range of efforts beyond these, 
indeed almost all forms of industry not agricultural, 
and not primarily mental. Now to say, in the broad 
sense, that protective duties are necessary in order 
that manufactures may succeed, is to make a state- 
ment which can be shown to be false. What is the 
magic of a protective duty? This, that it says to 
men who would otherwise come to our shores to 
trade, " You shall not bring those commodities you 
were about to bring, nor take away those commodi- 
ties you were about to take in exchange." People 
commonly look only at the first part of what is said, 
and console themselves by thinking, if foreigners are 
not allowed to bring those goods, somebody will make 
them at home for us. But this is only half of it. 
Those branches of manufacture, or of agriculture, as 
the case may be, which were furnishing the goods 
wherewith to pay for those commodities about to be 
imported but now prohibited, lose their market. If 
we will not buy, of course we cannot sell. If we 
prohibit importations, we thereby necessarily prevent 
exportations ; that is to say, we take away their mar- 
ket from those who manufacture or grow the goods 
which would be exported. We depress a profitable 
branch of manufacture by taking away its market, 
for the sake of introducing or fostering a branch 
which is by supposition and confession unprofitable. 



404 



ELEMENTS OF POLITICAL ECONOMY. 



The advocates of protection do not claim that branches 
of business which would otherwise be profitable and 
self-supporting should be protected, but only the weak 
and less profitable kinds ; and so to bolster up these, 
protective duties virtually destroy other branches of 
industry, which only ask that their natural market 
shall be let alone, to maintain an independent and 
profitable existence. It is impossible to characterize 
in terms of respect so short-sighted and miserable a 
policy. How can a free commerce depress manu- 
factures, when every nation must manufacture or 
grow a dollar's worth at home for every dollar's worth 
imported from abroad ? How can high duties foster 
manufactures as a whole, when their very first effect 
is to cut off from their market all those manufac- 
tures which would otherwise have gone abroad with 
a profit, and their second effect merely to stimulate 
up to the general level of profit those which it is 
claimed will not otherwise yield a profit ? 

The French manufacturers in 1861 were afraid 
that if the barriers of restriction were thrown down, 
as proposed in Mr. Cobden's treaty, their business 
would suffer from English competition. The result 
has shown how futile were their fears. A large part 
of the manufactures of either country are admitted 
into the other with perfect freedom, and the duties 
on most of the rest very materially reduced; and the 
French mianufacturers have found, as the American 
at no distant day will find, that there is nothing 
which stimulates manufactures so much as a broad 
market, — not merely a home-market, but a world- 
market. The French sent to England, in 1863, 1,076,- 
000,000 francs worth of goods and received back 



ON FOREIGN TRADE. 405 

within a trifle as much in return, which was almost 
a quarter of what they sent and received to and from 
the rest of the world. It is as the friends and not the 
enemies of manufactures that we demand the abro- 
gation of restrictive duties. Manufactures as a 
whole can never reach their point of just expansion, 
until this professedly discriminating, really repressing, 
and only at a few favorite points stimulating, system 
shall be abolished. 

But it is said, that England can work up cottons, 
and Germany wools, and the North of Europe irons, 
cheaper than we can. Those who have followed me 
thus far through this chapter, now know that abso- 
lute cost of production has little to do directly in for- 
eign trade. But if it be true that these commodities, 
or any others whatsoever, can really be obtained by 
us by a less expense of effort through exchange than 
directly, is there a decent reason why we should 
prefer to get them by the hardest when the easiest 
way is open ? We may be assured that we shall not 
get them without being obliged to pay for them, and 
to pay for them will require a fair expenditure of 
effort and skill. If foreigners have the advantage 
over us in some things, we have the advantage over 
them in many things, and all exchange- and the 
profits of it depend on relative superiority at differ- 
ent points. 

(5.) I pass to an objection much urged by Mr. 
Carey, and others, namely, that the United States, 
without the aid of protective duties, will be confined 
to agricultural pursuits, and no diversity of employ- 
ments, so essential to full social life, will come into 
play. But the truth is, diversity of employments is 



406 ELEMENTS OF POLITICAL ECONOMY. 

rooted in human nature, and in the circumstances 
amid which God has placed men, and so far is it 
from law being necessary to foster this diversity, that 
law is powerless to prevent it ! While we were col- 
onies of Great Britain, the laws were very strict 
against domestic manufacturing of almost all kinds, 
and yet long before the Revolution, the various 
branches of manufacture were introduced and prose- 
cuted in spite of the laws : clothiers' mills went up 
along the mountain streams; wool and woollens were 
exported to the West Indies and elsewhere ; iron was 
smelted and rolled and slit and plaited, and the man- 
ufacture of steel was attempted, and the germs of 
many diverse employments were expanding, notwith- 
standing the hostility of the law.^ Parliament felt 
itself called on to pass laws again and again prohib- 
iting under severe penalties these incipient manufac- 
tures, sometimes making them liable to summary 
destruction as " nuisances." As soon as a branch 
of industry becomes profitable, and suitable to the 
conditions in which a community is placed, nothing 
but extreme vigilance can prevent its springing into 
being. Men naturally, spontaneously, under the 
pressure of necessity render to each other such ser- 
vices as are in demand, and as are possible to be 
rendered in the state in which they are placed, Fos- 
ter manufactures artificially ? They will come in 
naturally and inevitably just so fast and so far as 
they ought to come in. They are as natural to men 
as agriculture. They require capital indeed, and on 
a large scale, a large capital. So does agriculture. 
Capital is the growth of time and of frugality. No 

1 See Hildreth, passim. 



ON FOREIGN TRADE. 407 

new society can come at once into all the forms of 
industry which adorn an old established State; there 
must be a gradual growth of capital and of skill, and 
as these increase, one branch of industry after another 
comes in, and finds a stable foothold ; and as capital 
further increases, and the rate per cent, of capital 
goes down, it becomes profitable to do many things 
which it would be sheer folly to do at an earlier 
period. When every dollar of the capital of a coun- 
try can realize a clear gain of ten per cent., is there 
any sense or reason in withdrawing a part of it into 
occupations which can only yield six per cent. ? 
" But we must have diversity," says Mr. Carey. 
Certainly, we want diversity, but only a natural 
diversity, in which each branch can stand on its own 
legs, and not find it necessary to tax all its neighbors 
in order that its own profits may equal the average 
of theirs. The theory of a protective tariff is this : 
that certain unprofitable branches of business shall 
be cared for by the State, that is to say, the citizens 
shall be taxed to bring up the profits of these to the 
general standard of profits. Is a diversity, thus 
secured, a profitable diversity ? Would it not be 
better for all concerned not to enter at present upon 
forms of industry that by confession do not pay? 
" But," urges the advocate of protection, " if they do 
not now pay, they will pay by-and-by." How do 
you know that they will ? The fact that they do 
not now pay, is not of itself good proof that they ever 
will ; and at any rate, it strikes a good many people 
that it would be better to wait till that time comes, 
and to enter upon branches of industry just as fast 
as they become profitable, and no faster. 



408 ELESIENTS OF POLITICAL ECONOMY. 

It seems strange to me, that Mr. Carey, whose 
general confidence in man and in nature is so justly- 
strong, should find his confidence desert him just at 
this point ; should show so much impatience with a 
natural progress of diversity and association ; and 
should vehemently invoke the assistance of law to 
help on diversity within a sphere for whose general 
freedom he is a distinguished champion. He is less 
consistent than the famous charioteer, who, when his 
horses ran away down the hill, trusted in Providence 
until the breeching broke, and then gave all up for 
lost. Mr. Carey trusts in Providence, and does well ; 
but all at once, when to other passengers as clear- 
sighted as himself there are no signs of anything 
giving way, he shrieks out that the breeching is 
breaking. Providence is inadequate, we must have 
recourse to Protection. 

The idea that the United States, with a greater 
variety and abundance of natural resources than any 
other country on the globe ; with an industrious, and 
enterprising, and skilful people ; with mountain 
streams which leap to the wheels of industry with a 
song ; with forests and coal-fields, and mines ; with 
marts and markets, and navigable lakes and rivers ; 
with a genius for traffic, and a keen eye to profit, — 
the idea that the United States is to be reduced to a 
mere farming country, unless government can be 
coaxed to tax foreigners and citizens in behalf of 
some branches of manufacture which are asserted to 
be otherwise unprofitable, — is too ridiculous for 
serious refutation. Why, no nation of the earth has 
such facilities for manufacturing: the raw materials 
are here ; the food is here in abounding measure ; the 



ON FOREIGN TRADE. 409 

instruments are here in water, wood, and coal ; cat- 
tle and horses and pastures are here ; everything is 
here which a nation can ask for with which to pro- 
duce either directly that which is wanted, or directly 
that with which to purchase at the cheapest rates 
what is wanted from abroad ; and if God shall give 
us grace to mind our own business, to avoid entan- 
gling alliances with our neighbors, and unnatural 
wars with foreigners, to rise above the silly jealousies 
which have hitherto restricted trade, we shall yet be 
the beehive of the nations, the chosen home of the 
industrial and civilizing arts. 

(6.) But Mr. Carey endeavors to discover a dis- 
tinction between commerce and trade. He says: 
." The words commerce and trade are commonly re- 
garded as convertible terms, yet are the ideas they 
express so widely different, as to render it essential 
that their difference be clearly understood. All men 
are prompted to associate and combine with each 
other, — to exchange ideas and services with each 
other, — and thus to maintain commerce. Some men 
seek to perform exchanges for other men, and thus to 
maintain trade." ^ This attempted distinction plays 
a very important part in Mr. Carey's system ; he is 
returning to it perpetually ; and according to it, com- 
merce increases as trade declines, the trader is a foe 
alike to commerce and society, and lives "by appro- 
priation," and restrictions ought to be laid on trade 
in order "to establish perfect freedom of commerce 
throughout the world." He complains that hitherto 
" commerce has been sacrificed at the shrine of trade." 
Now, I have no hesitation in affirming that this for- 

1 Social Science, Vol. I. p. 210. 



410 ELEMENTS OF POLITICAL ECONOMY. 

midable looking distinction is for the most part desti- 
tute of any basis of difference. Let us examine it. 
They who exchange services with each other, says 
the distinction, practise commerce, while they who 
perform exchanges for other men are mere traders. 
The distinction is made to turn on the ownership of 
the services exchanged : if the principals exchange 
for themselves, that is commerce ; if they employ 
agents to do it for them, that is trade ; if a merchant 
freights his own ship with his own goods and takes 
them to a foreign port, and takes care to exchange 
there with real owners only for what he wants in 
return, that is commerce ; but if he employs a super- 
cargo to manage his sales and returns, then it is trade. 
If a middle-man buys the cargo outright, and sells to 
another middle-man on the other side who is real 
owner of the return services, that is commerce under 
the detinition ; while in domestic exchanges all bar- 
gains mediated by employees is trade under the defi- 
nition. This, to say the least of it, is putting a fine 
point on commercial transactions ; and, so far as I 
can see, is totally irrelevant in a general doctrine of 
exchanges. Exchange is exchange, and the laws of 
exchange and the profits of exchange remain unaf- 
fected by any such distinction. Qui facit per alium 
facit per se. If I employ an agent to do any portion 
of my business for me, it is because I think it profit- 
able to do so, and there is an exchange of services 
between him and me for that purpose, but the ex- 
changes which he effects in my name as principal 
are in nature the same as if I effected them myself. 
If Mr. Carey wants to say that exchanges would be 
more profitable if there were no costs of carriage, no 



ON FOREIGN TRADE. 411 

clerk hire, no intermediate services of any sort, there is 
nobody to dispute with him ; but since exchanges can- 
not be carried on to any extent without these agen- 
cies, what is the use of quarrelling with Nature and 
Providence ? The transporter is just as much of a 
producer as the grower or transformer, — he renders a 
valuable service, and must be paid for it of course. 
As soon as his services can be dispensed with, and no 
loss accrue, they will most assuredly be dispensed 
with; but to say that people shall not employ such 
an agent if they think their interests subserved by 
employing him, can hardly be reconciled with any 
adequate notions of freedom or of exchange. All 
sorts of services are in order in exchange. All sorts 
of talent are available. If a man has not capital to 
do business for himself, let him begin by doing busi- 
ness for others. If a man can furnish a ship, but 
cannot freight her, there is no serious objection to his 
furnishing a ship. Let the merchant freight her, and 
let them divide profits on the return. If a distinction 
between commerce and trade be allowed, for which 
I see no ground whatever, each, at any rate, is swal- 
lowed up in the higher unity of exchange, and be- 
comes amenable to the principles already unfolded. 

It is in this connection, that Mr. Carey exalts the 
policy of Colbert, the famous finance minister of 
Louis XIV., who certainly did much for the prosper- 
ity of France, and well deserves the fame which pos- 
terity is so ready to accord. But to refer the immense 
industrial impulse which France received at that time 
in any considerable degree to the restrictive duties 
laid by Colbert on foreign trade, is an instance, by 
no means single in Mr. Carey's books, of a fallacy 



412 ELEMEI^TS OF POLITICAL ECOl^OMY. 

called by the logicians post hoc ergo propter hoc. It 
is most unsatisfactory and illogical to be told that 
one thing came after another and therefore was 
caused by it. Colbert did many things much better 
worth the doing than to lay prohibitory duties. He 
swept away, so far as lay in his power, all the obsta- 
cles to the freest interchange of commodities within 
the realm of France. He abolished the interminable 
internal tolls and duties. He simplified and reduced 
the taxes. Says Henri Martin, — " We are struck 
with admiration to see Colbert begin by reducing an 
impost thirty-three per cent., on the increased product 
of which he founded in great part his hopes. Tram- 
pling on the routine of the exchequer, he had com- 
prehended that consumption increases in equal or 
even greater proportion to the abasement of duties 
that weigh on consumable objects, and that the pub- 
lic treasury does not lose what the well-being of the 
people gains." ^ He abolished superfluous offices, and 
introduced economy, and, as far as possible, honesty 
into every department of the State. He emancipated 
the Communes from their old burdens, and forbade 
their incurring new debts. He renovated the whole 
industrial and financial system ; and France began 
mightily to prosper. But he was also in part, un- 
fortunately, a disciple of the mercantile system. He 
laid heavy duties on foreign goods, which of course 
provoked foreigners to lay similar duties on the prod- 
ucts of French industry. Martin himself, with whom 
Colbert is a hero, acknowledges this consequence. 
It has never been proved, and never can be, that the 
high duties contributed to the then prosperity of the 

1 History of France. 



ON FOREIGN TRADE. 413 

French ; the weight of bare authority is about evenly- 
balanced on the question ; but he who follows reason 
and science in the prenaises will not hesitate in his 
decision. 

(7.) It has been often urged, that we must have a 
restrictive tariff because other nations have a lower 
rate of interest and profits, and more abundant cap- 
ital than we have. It is fair to presume that they 
who say so know that foreign trade depends only 
very remotely on the absolute cost of the articles 
exchanged. If they do not know this, they are igno- 
rant of the one fundamental proposition of com- 
merce, and their reasonings as a matter of course 
cannot reach correct conclusions. If familiar with 
this proposition, they should see that any reference 
either to lower interest of money or to lower wages 
is, in this connection, entirely irrelevant. It is a 
matter of indifference to us what the goods we buy 
from abroad cost their producers, whether they paid 
high wages or low wages, high' interest or low inter- 
est ; we do not care about the absolute cost of pro- 
duction of anything we buy ; the question of interest 
for us is how much of the home commodity must 
we give foi^'t, and what does the home commodity 
cost us. The simple question that determines foreign 
trade is this, — would the commodity, if produced here, 
cost more ihan that commodity with which we buy 
it? If it v/ould, then we profitably import it; and 
this, without any reference to its cost to the foreign 
producer. Whether he pays high wages or low 
wages, high interest or low interest, whether capital 
is abundant there or scarce, has little to do with this 
question of a profitable exchange of commodities, 



414 ELEMENTS OF POLITICAL ECONOMY. 

ana justifies, in no conceivable manner, the restrict- 
ive system. California has much higher wages and 
a much higher interest than New England ; does she 
need, therefore, to prohibit New-England ships from 
entering the Golden Gate ? Is it for her interest to 
put restrictions on New-England goods ? Does New 
England, because wages are lower here, get more than 
her share of advantage in the California trade ? If 
not, no more would England or India in a trade with 
us. We trade with all the world : some parts have 
a higher rate of wages and interest than we ; some 
parts have a lower rate ; so far as that matter is con- 
cerned our trade may be equally advantageous with 
them all. 

To this law of foreign trade tliere is, however, 
a single not unimportant exception. When two 
nations go into the market of the world with the 
same commodity, to buy gold and silver, then the 
absolute money-cost of that commodity is, as 
between the two, an important question. That one 
of the two nations whose wages are lower, and 
whose rate of interest is less, in the manufacture of 
the common commodity wall, in a trade for gold, 
under-sell the other — that is,, can afford t^^ give more 
of its commodity for an ounce of gold, because its 
commodity has cost less in gold. This is clear, and 
it is the only case where foreign trade isc^etermined 
by the absolute cost of production. But our object- 
ors get no crumb of comfort here ; for in the first place, 
the commerce of the world is not a commerce for 
gold and silver, but a commerce of commodities, in the 
exchange of which relative cost is the only principle. 
And in the second place, when two nations go into 



ON FOREIGN TRADE. 415 

the market of the world for gold, they rarely carry 
the same commodity, but carry, each its own pecu- 
liar commodities, in the production of which it has 
the greatest advantage. They have a strong motive 
to do this always, for that which they have the 
greatest advantage in producing will buy all other 
commodities, gold included, at the cheapest rate. 
Here too the relative cost decides. And in the third 
place, if two nations do carry the same commodity 
into the same market to buy the same gold, and the 
nation whose wages and profits are higher is thereby 
at a disadvantage in the trade, how is a restrictive 
tariff at home to help that matter ? The true remedy 
is to cultivate our own peculiar advantages to the 
highest point, and carry those commodities abroad 
to buy our gold, and not endeavor to compete with 
our neighbor in the same commodity. High wages 
and high profits are a vast national advantage ; re- 
strictive systems tend certainly to reduce them ; but 
shall we throw away a great advantage enjoyed by 
all laborers and all capital in all departments, in order 
to compete with less fortunate nations in a single 
trade with a single commodity ? The folly of this is 
patent ; especially as the United States is a gold- 
producing country, and not only supplies herself with 
gold, but half the world besides. The United States 
produced in the twenty years from 1848 to 1868, 
$1,255,000,000 of the precious metals.^ Besides, is 
it not a little strange to hear the doctrine seriously 
propounded that we are put at a disadvantage in 
foreign trade, and that restrictions are made neces- 
sary, because on the whole we are making so much 
1 J. Ross Browne's Report, 1868. 



416 ELEMENTS OF POLITICAL ECONOMY. 

money ? If the current rate of interest and profits 
is so high with us, it shows that we are doing well 
on every hundred invested! One would suppose 
that capitalists might be content w^ith such high 
profits ! At any rate, one would think that the dis- 
advantage in trade would rest with those who get 
the less returns on their investments, rather than 
with those who get the larger returns ! 

If there be a lack of capital, or a lack of skill in 
any country, what is the remedy ? A protective 
tariff? If all the capital of the country is now taken 
up by branches of industry already existing, of what 
advantage is it to introduce a new branch which can 
only come into being at the expense of the old by 
withdrawing capital from the old ? The capital is 
already taken up. Let it abide in its freely chosen 
channels. If the capital of the country is not all 
taken up, then certainly new branches of industry 
will come in, will come in of their own accord; you 
cannot keep them out. Every kind of business, 
which, under present circumstances, is profitable, 
will be carried on, and those that are not profitable 
we do not want. > 

If the restrictive system could increase the capital 
of a country, then it might with some show of reason 
be defended, but it would be a difficult task, I think, 
to show how the capital of a country can be increased 
by stopping a profitable commerce. 

And just so of skill. If the new branch of manu- 
facture for which skilled labor is wanted is carried on 
abroad, the laborers can be easily imported. An 
assurance of higher wages and constant employment 
has brought and will bring again skilled laborers from 



ON FOREIGN TRADE. 417 

every country in Europe. Restriction cannot give 
us skill, since all experience has shown, and common 
sense testifies to the same point, that skill will be 
best developed under the freest competition — under 
circumstances where everything depends on relative 
skill, rather than where very little depends on it; 
where a high price, artificially created, is sure, whether 
skill be exercised or not. The sharp spur of emula- 
tion added to the keen impulse of interest, will most 
assuredly carry skill to its highest point. Nor is 
there any danger that our enterprise and skill will be 
overwhelmed by foreigners flooding our markets with 
cheap goods for the sake of strangling that branch 
of business on which our enterprise and skill are 
occupied. Commerce is an exchange of commodi- 
ties for commodities for the mutual advantage of the 
parties. Exchange is always a reciprocal act; when 
a man sells he buys, and when he buys he sells. K 
a foreigner brings goods to our shores he always car- 
ries away in effect a corresponding value from our 
shores. The only motive he has to bring anything 
hither is that he may carry something hence. He 
sells to us, and in the very act buys from us ; we 
buy from him, and in the very act sell to him. The 
commercial use of bills of exchange only disguises 
without altering this fact. Now to allege, as is often 
done, that foreigners will flood our markets at a loss 
to themselves, in order to discourage our manufac- 
ture of that article, is to ignore the motive from 
which commerce springs. Certainly they whose 
alleged profits are so much less than ours can ill 
afford such an operation as this; and until some 
well-authenticated case is given of foreigners willing 

27 



418 ELEMENTS OF POLITICAL ECONOMY. 

to submit to a present loss in the hope of a future 
and problematical gain ; until some well-authenti- 
cated case is given of a rising manufacture, adapted 
to our circumstances, and profitable in itself, being 
ruined in this way ; until the case is given of mag- 
nanimous dealers sacrificing present gains for uncer- 
tain benefits to accrue in part to their fellow-dealers, 
freighting ships to America to bring nothing back ; 
I shall beg leave to think that a thing so contrary to 
the interests of capital, to the laws of trade, and 
even to the principles of human nature, has not 
occurred in the past, and is not likely to in the 
future. 

(8.) A further objection to free trade remains to 
be briefly considered. It is this, and it has been 
urged with some plausibility and much pertinacity, 
namely, that every nation ought to be independent 
of others in all the more essential articles of life ; 
and therefore protective duties ought to be laid in 
order to compel the nations to make or grow all the 
articles of prime necessity for themselves. The ob- 
jectron divides itself into two parts, the postulate 
and the inference, and it shall be considered in that 
order and relation. First, every nation ought to be 
independent of others in respect to the supply of its 
more necessary wants, such as food, clothing, means 
of defence and offence, and so on. But what is it 
to be independent? I suppose it means, in this 
connection, to be sure of getting what is wanted 
under all contingencies. But is an individual man 
to be regarded as "dependent," and as likely to 
lose his bread, unless he devote himself to the grow- 
ing of food directly? If he only has wherewithal 



ON FOREIGN TEADE. 419 

to buy food, I take it that he is just as " independ- 
ent," just as likely to get it, as if he produced it 
himself; and so a nation which has products to 
offer which are in demand in the world without, is 
very sure of getting whatever it wants, provided it 
is anywhere to be bought, and is, in my apprehen- 
sion of it, in a very " independent " position. Pro- 
tectionists have degraded language and degraded 
exchange by trying to make it appear that a man 
and a nation are reduced to conditions of depen- 
dence whenever they find it for their interest to buy ; 
but the truth is that there is nothing dependent in 
buying and selling ; the parties stand on a footing 
of perfect equality towards each other ; each is at 
the same moment buyer and seller ; one is as inde- 
pendent as the other, and nobody can be more so 
than either, except the savage and the hermit, who 
live in a state of isolation. Moreover, every nation 
does of course devote itself directly to the supply of 
its principal wants, and always continues to do so, 
unless it appears that it can supply those wants 
more cheaply through exchange. If it can supply 
them more cheaply through exchange, it becomes, 
in my judgment, more "independent" by doing so; 
more independent of irksome effort, and more sure 
of getting its wants supplied, since now it draws its 
supplies from a wider surface, from any point in the 
wide world where such supplies are to be had and 
where its own products are in demand. So far as 
food is concerned, this objection sounds but poorly 
in the mouths of protectionists, who are th^ men 
perpetually bemoaning the prospect that every na- 
tion, unless it follow their advice and lay protective 
duties, will be exclusively agricultural. 



420 ELEMENTS OF POLITICAL ECONOMY. 

But the inference is even less defensible than the 
postulate. Let it be admitted, for argument's sake, 
that to buy is to be dependent, and that every nation 
loses a part of its independence by every act of for- 
eign exchange by which it obtains its necessary 
supplies; does it follow that protective duties are 
the true remedy ? No. Prohibition is the barrier to 
hold up before the waning independence of the na- 
tion. Why allow a thing to go forward under more 
onerous conditions, which under less onerous was 
proving fatal to independence ? If for the citizens 
to import freely be so disadvantageous to their inde- 
pendence, how disastrous must it be to have the 
importations still go forward under a tax in addi- 
tion, which the citizens must pay ! 

The late insurgent States of this country furnish 
a capital illustration of the fact that war and a 
stringent blockade cannot prevent exchanges from 
going forward, when there is wherewithal at home 
to' pay for goods, and goods abroad which are 
wanted at home. The United States maintained 
a thousand vessels, more or less, along the coast 
of the insurgent region, to intercept all trade ; but 
there was cotton within which the English wanted, 
and goods without which the insurgents wanted, 
and the exchanges went on, with great hazards and 
frequent losses indeed, but went on for four years, to 
an immense amount of transactions. 

(9.) The last objection to a free commerce that 
will be noticed here is the one that has been so perti- 
naciously urged in the " New York Tribune," namely, 
that the higher paid labor of this country makes it 
impossible for us to trade freely with those nations 



ON FOREIGN TRADE. 421 

in which a lower rate of wages prevails. This objec- 
tion has more than once been impliedly answered in 
these pages ; but it requires, and can be given, a spe- 
cific refutation. There is a fallacy that pervades 
every article on the subject in the. newspaper referred 
to that has fallen under my notice. It is one of the 
many fallacies that have their luf king-place around 
the word ^'■ivagesP It is admitted that the rate of 
wages rules higher in this country than in European 
countries, and all good citizens, I believe, ifsjoice that 
the reward of laborers is high here, and desire it to 
become higher rather than lower in the time to come. 
But a high rate of wages does not necessarily im- 
port a high cost of labor. This was demonstrated at 
length in our chapter on Cost of Production. The 
cost of labor to the capitalist is made up of three 
elements : first, the nominal rate of wages ; second, 
the efficiency of the labor ; and third, the dearness 
of the commodity in which the laborer is paid. It 
would seem to be a patent fallacy to confound one 
component with a resultant of three components ; 
and yet the writer in question invariably proceeds in 
his discussions as if a high rate of wages means a 
high cost of labor. He uses the former term as if it 
were synonymous with the latter. The arguments 
proceed, and the conclusions are reached, on the as- 
sumption that the cost of labor is higher in this 
country than in Europe, while all that is asserted in 
the premise, and all that is true, is, that the nominal 
rate of wages is higher. The logical force of the pro- 
cess and the security of the conclusion are destroyed 
the moment it is perceived that rate of wages and 
cost of labor are two very distinct things. It is for-. 



422 ELEMENTS OF POLITICAL ECONOMY. 

tunate for the United States that the two things are 
distinct ; for while the rate of general wages is higher 
here than in Europe, the cost of general labor is lower 
here than in Europe. The unmixed evils of a de- 
bauched currency are perhaps disguising this truth 
at the present moment, but it is a truth nevertheless 
that cannot be questioned when the light of the fol- 
lowing considerations is cast upon it. (1.) The cost 
of labor must be lower in this country than in Eu- 
rope because the rate per cent, of capital is higher. 
Labor and capital alone conspire in production. 
Profits are the leavings of the cost of labor. If, there- 
fore, on every hundred invested the rate of profit is 
higher, the conclusion is unavoidable that the cost 
of labor is lower. (2.) To account for this lower 
cost of labor, we have (a) The fact of the greater 
efficiency of labor. The greater the efficiency of 
labor, other elements a^ before, the less its cost to 
the employer. Labor is more efficient here, because 
the motives to labor are stronger and higher, because 
the general tone of things is more energetic, and be- 
cause labor, all departments being considered, is more 
generally armed with labor-saving appliances. We 
have (&) The usually cheaper cost of that in which 
labor is paid. Abroad the laborer is paid in gold 
and silver. Here he is usually paid in a depreciated 
currency. Besides this, the price of general com- 
modities even on a gold standard is usually higher 
here than abroad. Therefore the cost of even gold 
to pay his men is less to the employer here. We 
have (c) The fact that fewer persons are employed, in 
establishments that do equal work, here than there. 
, There there are more supernumeraries, more persons 



ON FOREIGN TRADE. 423 

more or less pensioned by the establishment, more 
gradations in authority, more wages of superintend- 
ence. Here, the fewest possible number of persons 
is employed, there is comparatively little superin- 
tendence, and each person is put upon his or her full 
power of work. These three considerations, (and 
others might be mentioned,) sufficiently account for 
the lower cost of labor here, since they more than 
overbalance the excess in the rate of wages paid ; 
which excess, other things being equal, would en- 
hance the cost of labor. The balance is decidedly 
on our side, as is shown by the current rates of profit 
and interest. Indeed, the excess in nominal wages 
paid is not so great as is commonly supposed, allow- 
ance being made for the different currencies. A 
skilled artisan in England earns eight shillings ster- 
ling per day, that is, two dollars in gold. Our own 
skilled artisans earn not much more. " The English 
agricultural laborer who earns fifty cents or two shil- 
lings sterling per day, earns say three pounds per 
month, and pays about this sum for the annual rent 
of his cottage. Now the laborer in this country sel- 
dom pays his annual rent by a month's wages." ^ 
I have learned by inquiry on some of the factory- 
grounds in Massachusetts, that, as a general rule, a 
month's wages of the men just about pays the an- 
nual rent of their tenement. 

At any rate, there is no such difference in the 
wages, and certainly not in the cost, of labor be- 
tween this country and Europe, as puts us at any 
disadvantage in the freest trade with Europe. Eu- 
rope has certainly some advantages which we have 

1 Sidney Homer. 



424 ELEMENTS OF POLITICAL ECONOMY. 

not: we as certainly have many advantages which 
Europe has not. The '•'■ pauper-labor ''"' argument- 
does not hold. Pauper- labor is notoriously vexj poor 
labor to those who employ it. It is one of our grand 
advantages that our labor is not pauper-labor, but the 
opposite of it. Besides, if the argument of the 
" Tribune " were sound, we could not show the record 
that we do in the exports of domestic produce made 
and grown under these wages. According to the 
Finance Report of 1864, we exported to foreign coun- 
tries, in the five years 1860-64, of domestic prod- 
uce, exclusive of specie, $1,328,117,357. The total 
of imports for domestic consumption for the same 
interval was $1,395,150,599. These official figures 
hardly countenance the alleged disadvantage. 

I have now answered, with what success the reader 
must judge, every considerable argument that I am 
aware of as urged in this country against the policy 
of a free commerce. I have a few brief objections 
to add to the opposite doctrine of Protection. 

(1.) It is no part of the proper province of govern- 
ment to undertake to redistribute the rewards of in- 
dustry. Government has a right to take a part of 
the fruits of every man's industry for its own main- 
tenance ; but when it goes beyond this, and forcibly 
takes a portion of the fruits of one man's industry to 
reward another man's industry, it steps out of its 
true sphere. Every man has a right to all the re- 
wards of his own industry, except as to that part 
which government takes in legitimate taxation. No 
government is wise enough, or ever will be, to say 
how much of the results of my labor I shall con- 
tribute to my neighbor to remunerate his labor. 



ON FOREIGN TRADE. 425 

Congress has nothing to say about that. Congress 
is bound to give us both the benefit of equal laws, 
and then to leave us both to take care of ourselves. 
It is no part of the duty of Congress to see that any 
set of men whatever are making money. When, 
therefore, any branch of industry, in the exigencies 
of business, is depressed, for the leading men in it to 
go to Congress with their tale of woe, to induce that 
body to lay a tax for their relief on their neighbors, 
to empower them to pass round the hat in the com- 
munity, like mendicants, and compel other men to 
drop their contributions into it, is as pitiful on the 
one side as it is extra-governmental on the other. 
The American people are patient, but they have 
borne with this sort of thing about as long as they 
will bear with it. 

(2.) It is a second objection allied to the first, that 
the protective scheme is wholly a matter of finesse. 
ii all interests were "protected" and "protected" 
alike, the issue of all the distributions and redistribu- 
tions would be that each interest would stand ex- 
actly as when the process began. This would not 
do. Therefore it becomes a struggle of interests ; 
and each interest, or combination of interests, en- 
deavors both to get itself " protected " and that the 
rest shall not get " protected." The woollen men, 
for example, are anxious for high duties on foreign 
woollens, but are much less anxious for high duties 
on foreign wools. The wool-growers, however, do 
not see why they are not as much entitled to " pro- 
tection," that is to say, to rob the public, as the 
woollen manufacturers. It would be difficult for 
anybody to see why they are not as much entitled 



426 ELEMENTS OF POLITICAL ECONOMY. 

to it. Which, then, shall get the better of the Com- 
mittee of Ways and Means ? That is the question. 
It is a question of lobbies, of influence, of indirect 
•or direct bribery. So of other interests. The fact 
is, that the leading interests protected have been 
obliged to yield so much to the pressure of other in- 
terests with equal claims to protection, that, with a 
few exceptions, no classes would be benefited so 
much by the abolition of all protection as would 
they. They have purchased the right to pluck the 
community at one point by conceding to other par- 
ties the right to pluck them at a dozen different 
points. The woollen manufacturers, for example, 
have to pay a considerable duty on foreign wools, 
a high duty on foreign machinery, and an enor- 
mous tax for protection on every pound of iron 
they use. If now the principle of protection were 
abandoned, they would be relieved of all the con- 
tributions levied on them by others, and the public 
would be relieved of the contribution levied on it 
by them. It would be a relief all round. The 
interests of the manufacturers are coincident with 
the interests of the public. The product cheapened 
by the abolition of all these high duties, as well 
those which the manufacturers have to pat/ as those 
which specially protect them, would find a vastly ex- 
tended market, not at home only, but also abroad ; 
and such depressions in business as the woollen men 
are now suffering from would become rare indeed. 
Those branches of business, like the boot and shoe 
business for instance, which have never had a sylla- 
ble of protection in the United States, have been the 
most prosperous and are now the sti'ongest. They 



ON FOREIGN TRADE. 427 

have to send no delegations to Washington. They 
expend the ingenuity and the money which protected 
interests spend in artifices, in the development of 
their business ; and they have found, what the others 
at no distant day will find, that honest industry and 
skill are better in the long run than the highest 
strategy of the lobby. 

(3.) Protection is a wasteful way to reach the end 
ostensibly proposed by it. It is claimed to be need- 
ful to encourage weak branches of business. Let us 
suppose for argument's sake, what would be folly to 
concede in reality, that it is desirable for the public 
to encourage a presently unprofitable business. How 
can it most cheaply and most certainly do this ? 
Clearly enough, by offering a direct bounty on all 
that is actually produced. Let the public know 
what it gets for what it gives. Suppose the article 
wanted be hats. It is unprofitable at present to 
manufacture hats, but the public thinks it desirable 
to introduce the manufacture at the expense of the 
people. Very well. Let the government offer to 
pay outright from the public chest, say $2, for all 
hats of a certain quality made in the country. The 
bounty would be paid only so far as the manufac- 
ture was actually carried on. This stimulus would 
be explicit. All would be open and above-board. 
Everybody could see what was done, and what it 
was done for. This would be demonstrably the 
cheapest and most certain way to encourage hat- 
making. For suppose, on the other hand, the pro- 
tective method be adopted, and a duty of |2 apiece 
be laid on foreign hats to encourage the home manu- 
facture. Every consumer now pays an extra $2 for 



428 ELEMENTS OF POLITICAL ECONOMY. 

his hat, but there is no assurance that anybody will 
go into hat-making. Nobody is pledged to do it. 
It will depend upqn the comparative prospect of 
making money in that, or other business, whether 
that business is continued and developed under the 
duty. Suppose, however, that the home market is 
one half supplied by the home production, and one 
half by the foreign article enhanced $2 in price by 
the duty. Suppose the market takes 2,000,000 hats. 
Then ^4,000,000 are paid by consumers to encour- 
age hat-making, when $2,000,000 in bounties would 
encourage it to the same extent. Unless the duty be 
so high as to keep out the foreign article altogether, 
there is a good deal of money paid by the people for 
hats that does not encourage hat-making. The sys- 
tem is wasteful. Why then is it preferred ? It is 
preferred for the same reason that the fisherman pre- 
fers water a little muddy to fish in. The destined 
prey cannot see the operation of things so well ! 
Protection is a cover under which^ the people are 
cheated. Is it strange, then, that the people grow 
indignant? 

(4.) Protection makes a promise at the outset 
which it rarely fulfils. Special interests ask for pro- 
tection to enable them to " start," holding out the 
promise that they will soon be able to walk off" alone. 
Unluckily, the facts all show that that time, in their 
judgment, never comes. The interests which are the 
most highly protected in the United States at this 
moment, " started " in Massachusetts more than two 
centuries ago ! The manufacture of linen, woollen, 
and cotton cloth was begun in Massachusetts in 
1638, in Rowley, by some families from Yorkshire; 



ON FOREIGN TRADE. 429 

and became so remunerative in less than three years 
that several acts of the General Court designed to 
stimulate it were repealed.^ The manufacture of 
woollens began in Massachusetts 230 years ago, 
and yet in the year of our Lord 1868, under an 
enormous protective duty, higher than was ever be- 
fore levied in this country on that class of goods, 
we are told constantly that " this immense industrial 
interest is in immediate danger of being destroyed by 
foreign importations I ''^ Do not these facts, and 
they might be multiplied indefinitely, throw a little 
discredit on the promises of protection ? " We shall 
soon be able to go alone." Yes : but ivhen ? The 
duty on foreign iron is unprecedentedly high at this 
moment, and yet we read out of an unquestionable 
authority that, in 1676, " as good iron was made as 
any in Spain " in Massachusetts, and that there were 
" six forges for the making of iron in the colony." ^ 
The absurdity of this strong point of protection is 
apparent the moment its principle is attempted to be 
applied in domestic trade. If a new Boston dry 
goods' house should set up in Franklin Street along- 
side the old established houses there, and modestly 
charge its customers fifty per cent, additional on all 
goods, so as to enable it to " start " and to " compete " 
with its neighbors, it jequires no prophet to predict 
that the " run " of its trade would be in the wrong 
direction. Young men, sometimes with little capital, 
are starting every year in all branches of business, by 
the side of old firms in settled business, and they 
succeed by dint of tact, skill, and industry. The 

' 1 Talfrey's Hislory of New England, Vol. 11. page 53. 

^ Falli-ey, Vol. 111. page 299. 



430 ELEMENTS OF POLITICAL ECONOMY. 

United States will succeed by dint of the same, 
and not otherwise. Let us hear no more, then, of 
this deceptive talk about " starting." Credat Judceus 
Apella. 

(5.) Protection always gives birth to smuggling, 
and other frauds upon the revenue. Secretary 
McCulloch, in his Report for 1866, estimates these 
for that year at ^92,000,000. The country will do 
well to ponder over this instructive official commen- 
tary on the princiole of high duties. " Gentlemen," 
said Sir Robert Peel to the House of Commons in 
1842, " what is the use of fixing our rates so high as 
to allow the smuggler to underbid us ? " Smuggling 
has always accompanied high protective duties, and 
always will. Laws and vigilance have been unable 
to prevent it. Laws and vigilance are unable to pre- 
vent it now. To evade honest taxation is a high 
crime against society. To evade laws passed, not 
for revenue, but to foster class interests at the ex- 
pense of the many, is a much less crime. It is a 
rude attempt to right a wrong. Government is the 
first and main offender. Let it yield to all men their 
just rights, including the right of free exchange sub- 
ject only to fair taxation, and it will have no occa- 
sion to hang smugglers, and spend millions of the 
people's money in useless vigilance. To levy such 
high duties as either to prevent importations or to 
encourage the smuggler is a gross mistake. The 
country loses its revenue, the honest importer his 
business, the public morality becomes corrupted, and 
the manufacturer is not ultimately protected. 

(6.) Protection defeats itself. The grower of the' 
raw materials demands his share of protection, new 



OF FOREIGN TRADE. 431 

competitors spring up on every hand to realize the 
expected gains, the workman demands increased 
pay, the expense of production becomes factitious, 
while the resulting high prices diminish consump- 
tion. The desire to grow rich at the public expense 
ultimately proves a snare, as is now apparent to our 
woollen manufactm'ers. True and permanent pros- 
perity comes from cheap production and the natural 
laws of trade and industry. It is a deep satisfaction 
to advocate a system, which, when it shall have been 
adopted, will prove alike advantageous to every class 
in the community, to manufacturers as well as to 
their customers. 

It is alw^ays pleasant to be able to confirm one's 
reasonings v^^ith facts, to clench the nail driven home 
by a logical process, with a blow or two from the 
hammer of actual experience. It is fortunately pos- 
sible to do this in regard to free trade. The Greeks 
and Romans, though the latter at times stopped the 
exportation of specie, never dreamed of putting ob- 
stacles in the path of ordinary traffic. At Athens, all 
exports and imports were subject to a duty of two per 
centum. In the ports of her subject allies, Athens 
laid a duty of five per centum, in lieu of tribute. 
When, in a few exceptional cases, she laid ten per 
centum, it was denounced as downright extortion. 
The ports of Rome and Italy sometimes enjoyed a 
perfectly free trade ; but generally, in them, and in 
the ports of the provinces, a revenue tax of five per 
centum was levied under the Republic, and two and 
a half per centum under the Empire. 

England in the year 1842 abandoned for substance 
the doctrine of protection, and seven years later 



432 ELEMENTS OF POLITICAL ECONOMY. 

abolished a main feature of the system in the 
discrimination till then maintained in favor of her 
own ships over those of foreigners in her own ports. 
There is nothing now to hinder American ships 
from competing on equal terms with English ves- 
sels in the coastwise carrying-trade of England 
itself. The English tariifs are adjusted with a view 
to revenue merely ; and in the late special commer- 
cial treaty with France, the duties were thrown oif 
entirely from a portion of French manufactures, and 
materially reduced on most of the rest. England 
claims, through the mouth of her responsible min- 
isters and statesmen, to set before the nations an 
honest example of free trade ; and invites them, as I 
believe, in good faith, to. follow her in the path which 
she has opened up for herself. The force of this ex- 
ample is frequently sought to be parried by alleging 
that England reached through protection a point of 
prosperity at which she was well able to dispense 
with protection. This is neither ingenuous nor true ; 
since the men who have persuaded the English gov- . 
ernment to abandon the principle of protection, are 
the men who have demonstrated the economical 
folly of the principle under all circumstances; and 
have shown that England maintained the policy so 
long at a loss to herself as well as her neighbors. 
Other nations can say, if they please, " We will 
maintain protection as long as England did, and 
then follow her example in giving it up." But if 
they do this, they will do it at a loss, as England 
did, and too late bemoan their folly, as England 
does. Said Mr. Gladstone, Chancellor of the Eng- 
lish Exchequer, in 1856, — " There is one domestic 



ON FOKEIGN TRADE. 433 

feature which I wish it were in our power effectually 
to exhibit to the governments and inhabitants of for- 
eign countries. They know by statistics, which are 
open to the world, the immense extension which our 
commerce has attained under and by virtue of free- 
dom of trade, and the great advancement that has hap- 
pily been achieved in the condition of the people ; but 
they do not know what it has cost us to achieve this 
beneficial, nay, blessed change; what time, what 
struggles, what interruptions to the general work of 
legislation ; what animosities and divisions among 
the great classes which make up the nation; what 
shocks to our established mode of conducting the 
government of the country ; what fears and risk, at 
some periods, of public convulsion. These were the 
fine and penalty we paid for long adherence to folly. 
We paid this fine and penalty upon returning to the 
path of wisdom, which too late we wished ^^e had 
never left. It is not easy to calculate its amount, 
but if it could be exactly reckoned, and fully ex- 
posed to the eyes of other nations, our juniors in 
trade, it might supply them with a timely warning 
against imitating our former errors, and with the 
best encouragement to the adoption, before they 
become entangled in the creation of artificial inter- 
ests, of our recent and better example." 

But it is said, as if that were sufficient to con- 
demn free trade, that England adopted it out of 
pure selfishness. Of course she did ; and other na- 
tions will also adopt it from the same motive. No 
other motive is appropriate in the premises. The 
idea, disseminated by protectionists, that it requires 
a milleniura for free trade to work in, is wholly falla- 

28 



434 ELEMENTS OF POLITICAL ECONOMY. 

cious ; it requires an enlightened selfishness, and 
nothing more ; and it is one of the grand wonders 
of Providence, that the elements of society are so 
wisely prearranged, that, within the sphere of ex- 
change, the welfare of all is promoted through the 
enlightened selfishness of each. Trade is always self- 
ish, just as much so under freedom as under protec- 
tion ; it is a sphere all whose operations are subject to 
the legitimate control of conscience, but it is not, and 
never was designed to be, a sphere of sympathy and 
benevolence: these have a sphere of their own, above 
and beyond the sphere of exchange. When a man 
gives, let him give, and enjoy the luxury of doing 
good ; when a man buys and sells, let him honestly, 
but with an eye to self-interest only, buy and sell 
and get gain. 

The exports of England in 1842 were but little in 
excess of those of the previous thirty years : they 
were in that year X113,841,862 ; in 1865 they were 
.£363,067,112. The imports in the same period rose 
from X65,253,286 to £181,806,048. The number 
of articles subject to duty in the customs' tariff" in 
1842 was 1150 ; the number of articles at present 
charged with duty is 43. The revenue has kept re- 
markably steady under the successive remissions of 
duty, and is just about the same now when 43 arti- 
cles are taxed as it was in 1842 ; that is, between 
twenty-two and twenty-three millions pounds ster- 
ling. The exports of particular branches of Brit- 
ish manufactures have increased between 1842 and 
1865 : haberdashery, nearly sevenfold ; cotton, nearly 
threefold ; earthen-ware, threefold ; leather, sixfold ; 
hardware, more than threefold ; linen yarns, 100 per 



ON FO-REIGN TRADE. 435 

cent.; linen manufactures, fourfold; machinery, ten- 
fold ; iron and steel, fivefold ; tin plates, fourfold ; 
silk, fourfold ; woollen yarn, eightfold ; woollen man- 
ufactures, fourfold. The repeal of the navigation 
laws in 1849 has worked equally happy results. 
British tonnage entered with cargo was 5,415,821 in 
1842, and 17,413,643 in 1865. Foreign tonnage at 
the former date was 1,930,983 against 7,572,202 in 
1865. Ship-building was thrice as great in 1865 as 
in 1842.1 Was there ever a brighter commercial 
picture ? 

The year 1860 is memorable in the history of Eng- 
land for the negotiation and ratification of the French 
Commercial Treaty, and also as the year in which 
the remaining duties, avowedly of a protective char- 
acter, were repealed. The results to France of the 
relaxation of her own duties are only less brilliant 
than those to England, as she has less fully em- 
braced the system of freedom. Comparing 1859 
with 1864, the exports of French manufactures in- 
creased 687,800,000 francs. It was said that the 
cotton, linen, and woollen manufactures would suffer 
most from English competition. But the cottons 
exported in 1864 were 26,000,000 francs more than 
in 1859 ; the linens 9,000,000 francs more ; and the 
woollen industry, which was to be utterly annihi- 
lated, has almost doubled. Metallic exports rose in 
the five years 1,500,000 francs, and exports of ma- 
chinery 2,500,000 francs. These last figures are the 
more remarkable, inasmuch as France is less richly 
endowed with metals than any other country in 
Europe ; but although she has to import the raw 

1 Librarian British Board of Trade. 



436 ELEMENTS OF POLITICAL ECONOMY. 

materials, her skill in working them up is such that 
she increases the value of her metallic exports in a 
single lustrum 4,000,000 francs ! The explanation 
of this is partly due to the fact that the French have 
learned better than any other people the money value 
of elegance. They have learned that Beauty is a 
source of Wealth ; and so they not only adorn their 
capital, and have made it by far the finest city in 
Europe, attractive as a resort to all the world, but 
also they contrive to make all their handiwork beau- 
tiful, and thus control in many things the markets, 
as they do also the fashions of the world. 

The ZoU-Verein, or Revenue-Union of the Ger- 
man States, presents a splendid example of the pros- 
perity which follows in the train of free exchange. 
The rate of imposts on foreign goods is varied from 
time to time by the Zoll-Verein Congress, but ten 
per cent, is the maximum, and the interests of the 
revenue are consulted in adjusting the rates below 
that: since 1851 the raw materials coming from 
abroad are admitted free, or nearly so. The pro- 
ceeds of these duties go into a common treasury, 
and are then distributed among the various members 
of , the Union on the basis of their population. 
Every member without exception now receives a 
larger revenue than it did before it joined the Zoll- 
Verein. The city of Hamburg, a chief distributing 
point for the imports, is a sort of bonded warehouse 
under the system. The dutiable articles are arranged 
in thirty-seven classes ; and the simplicity of the 
rates, the lowness of the rates, and the fewness of 
the articles charged with rates, stand in striking con- 
trast to these points in the present tariff of the United 



■ON FOKEIGN TRADE. 437 

States. It is difficult to compare numerically the 
rates in the two tariffs, because under the Zoll-Verein 
the rates are almost exclusively specific, and in our 
tariffs mostly ad valorem^ or specific and ad valorem 
combined. On pig iron, the German duty is 12 cents 
per cwt. ; the American duty 45 cents per cwt. On 
loop, rolled, and hammered iron, the larger iron and 
steel wire, and cast steel, the German duty is 60 
cents per jjwt. ; the American duties on the same 
vary from $1.00 to $2.50 per cwt., besides a high ad 
valorem duty on wire. But. the home production of 
iron within the Zoll-Verein has increased steadily 
with the increase of the importation of foreign iron ; 
so of other staples ; an interesting proof that the rela- 
tively free introduction of foreign articles does not 
depress but rather stimulate the production of similar 
articles at home, provided there be fair natural ad- 
vantages.^ 

Our last example shall be Belgium. The perfect 
free trade which Belgium enjoyed in the sixteenth 
century gave an impetus to her industry and to her 
commerce which placed her at that period at the 
highest pitch of commercial prosperity. From 1792 
to 1814, that country was controlled by the French, 
who applied to it the protective system with extreme 
rigidity. From 1814' to 1830, Belgium was united 
with Holland, and the two had in common a cus- 
toms' tariff based on a maximum duty of 3 per cent, 
on raw materials, and 6 per cent, on manufactured 
goods. It was during this period that the modern 
manufactures of Belgium were brought into exist- 

1 Zolltarif des Deutschen Zoll-Vereins. I am indebted for a copy of this 
to the kindness of our minister at Berlin, Hon. George Bancroft. 



438 ELEMENTS OF POLITICAL ECONOMY. 

ence, and made that astonishing progress which was 
demonstrated by an exhibition of national industry 
in 1830. A violent revolution, based on a difFerence 
in race, language, religion and traditions, then separ- 
ated the Belgians from the Dutch, and the former 
reim posed upon themselves a protective system with 
such results in revenue and trade and industry, that 
M. Fr^re Orban, then and now Minister of Finance, 
came forward in 1851, and declared his. intention 
gradually to remove froni the tariff every duty that 
could be called " protective." With this view, a new 
tariff went into operation in 1855 ; and another, 
actually fulfilling that intention, in 1866 ; so that 
now, a tariff is maintained solely for revenue; and 
an almost universal public opinion finds fault with 
it, not that it is so free, but that it exists at all. The 
chambers of commerce in Belgium have unanimously 
passed resolutions advising the government to raise 
the revenue now raised by duties in some other way, 
and thus introduce a perfect free trade.^ 

I have dwelt the longer on this question of free 
trade, because it is a practical one now in this coun- 
try, for whose right solution every citizen should be 
anxious. Some additional light will be thrown upon 
the subject in each of the three remaining chapters. 

1 Letter of M. Vander Maeren, of Brussels, April 10, 1868. M. Vander 
Maeren is a manufacturer, member of ftie government, and weU known as 
a writer on economic subjects. 



ON THE MEECANTILE SYSTEM. 439 



CHAPTER XIV. 

ON THE MERCANTILE SYSTEM. 

There have been three epochs in the progress of 
the science of Exchange. Each of these has been 
marked by a theory of its own, of which the two 
earlier were radically incorrect, yet prepared the way 
for the third and true system. We have already 
sufficiently considered the first of these theories, 
which assumed that gold and silv -^r are the only 
wealth, and, consequently, that the only way for a 
nation to grow rich was to foster the importation 
and prohibit^he exportation of the precious metals. 
The second commercial theory was more refined 
and complicated ; we have already spoken of it as 
the Mercantile System, and partially explained its 
fundamental principle. The principle was to pre- 
serve the balance of trade, to make the exports 
greater than the imports, so that the balance should 
come back, in gold and silver. The whole system is 
based on the absurd supposition that a merchant 
will carry abroad goods worth at home a certain 
sum, merely that he may bring back goods and 
money worth as much. Why, on that principle, 
should he carry forth goods at all ? 

The nature of trade, as mutually advantageous, 
was not understood. After every fair mercantile 
transaction, both parties are richer than before. The 



440 ELEMENTS OF POLITICAL ECONOMY. 

more genuine exchanges there are between two 
countries the better, because the motive for an ex- 
change is always and everywhere the mutual inter- 
est of the parties. The benefit of the exchange is 
shared by both, otherwise there would be no ex- 
change. 

But the Mercantile System led each nation to 
suppose, that, by manoeuvre and finesse, it could 
obtain more than its natural share of advantage. 
England, for example, in her trade with France, 
found that, by natural tendency, she bought as much 
of French wines and silks as she sold France of 
hardware and woollens. Instead of being satisfied 
with a legitimate and mutually advantageous trade, 
the English, under the promptings of the Mercantile 
System, say, " This will never do. This will never 
do. There is no balance in our favor. We must 
sell to France more than we buy of her, or else we 
get no' balance of trade." Accordingly restrictions 
are laid on some French goods. Their introduction 
is either prohibited, or heavy duties are levied on 
them, in order to lessen the quantity imported. This 
is done in the hope of selling to the French as much 
as before, but of buying less, this is, less French 
goods ; so that the difference must be paid in gold 
and silver. 

All that was mighty well ! But unfortunately the 
gold and silver, even if they should get it, was no 
whit better than the French goods, and would prob- 
ably go right back to France in the purchase of such 
goods. And unfortunately also the French were 
adepts in the Mercantile System ; they wanted a 
favorable balance too. They must sell more than 



ON THE MERCANTILE SYSTEM. . 441 

they buy. Their exports must exceed their imports. 
Why not ? And accordingly they prohibit some 
species of English goods, or burden them with a 
heavy duty ; the English retaliate by new restric- 
tions on the products of French industry, and are 
again in turn retaliated upon. Thus they go on 
tinkering and tormenting trade in the vain hope of 
some imaginary balance ! 

Because England and France are adjacent, and 
because their natural productions and acquired in- 
dustry are so very divetse, they are naturally to an 
immense extent mutual buyers and sellers. France 
is gifted, perhaps as much as any country upon 
earth, in point of soil, climate, and natural produc- 
tious. She produces with the greatest facility, and 
in the greatest abundance, wines and the cereal 
grains ; and has unusual advantages also for the 
culture of the mulberry and the manufacture of 
silk. 

England is not thus blessed by Nature ; but she 
has freedom, and industry, and energy, and skill; 
these- have made her for centuries the greatest man- 
ufacturing and commercial country in the world. 
She has always had those things to sell which 
France wanted to buy, and has always wanted to 
buy those things which France has had to sell. Ex- 
changes between two such countries are natural and 
inevitable. If the governments undertake to forbid 
them, then the business will be done by smugglers, 
though with hazard and loss. 

Now, the Mercantile System disturbed and well- 
nigh destroyed this natural and profitable trade. 
To be sure England could buy her wines of France 



442 ELEMENTS OF POLITICAL ECONOMY. 

much cheaper and of better quality than of Portu- 
gal ; but then, the balance of trade with France was 
supposed to be less favorable than with Portugal ; 
and therefore the French wines were prohibited, 
and the monopoly of supplying the English market 
was given to the Portuguese. The English drank 
poorer wines at a greater expense. If this were all, 
it would not have been so bad; but the French, to 
retaliate and to restore the balance, prohibited Eng- 
lish woollens. Thus the English were not only 
obliged to regale themselves on poor wine at a high 
price, but to lose an excellent market for woollen 
goods. The French lost not only the best market 
for their wines, but must purchase their woollens 
elsewhere at an enhanced cost. It was a dead loss 
all round — a gratuitous Ipss without any compen- 
sation whatever. 

So far has this regulating mania been carried at 
times, that almost all legitimate commerce ceased 
between the two countries. Adam Smith tells us 
that, in his time, that is less than a hundred years 
ago, smugglers were the principal importers of Brit- 
ish goods into France, and of French goods into 
Britain. So reluctant was England to buy of France, 
so fully were her statesmen under the influence of 
the prejudice that the prosperity of her neighbors 
was incompatible with her own, that Parliament, as 
late as William and Mary's time, decreed that the 
French trade was a nuisance. 

(1.) This laying extraordinary restraints on the 
importation of goods from those countries with 
which tlie balance was supposed to be unfavor- 
able, was one device of the Mercantile System to 



ON THE MERCANTILE SYSTEM. 443 

increase the quanti'ty of gold and silver. It was 
unfortunately not the only nor the worst one. The 
great idea was, you perceive, to discourage importa- 
tion and to encourage exportation, in order that the 
country might grow rich by the stream of gold and 
silver which, it was supposed, would pour in to pay 
the balance between the large exports and the small 
imports. 

(2.) An obvious expedient was to prohibit alto- 
gether, or to burden with very high duties, the intro- 
duction of all such goods as could be produced at 
home. If we can produce the articles at home, then 
we shall not have to import them, and that will help 
the balance. Under the influence of this feeling, 
England, damp and cold, in the very teeth of Na- 
ture's protests, undertook to rival France in the 
culture of silk. Heavy restraints were laid on for- 
eign silks, and the monopoly of supplying the home 
market was given to her own manufacturers. Cer- 
tainly, silk can be made in England, of a somewhat 
inferior quality and at a somewhat greater cost than 
in sunnier climes. To overcome these disadvan- 
tages, what was needed was the healthy stimulus of 
competition. If things had been left to take their 
natural course, and foreign silks had been admitted 
freely, the home manufacturers would have been put 
upon their mettle to discover improved processes, to 
invent machinery, to make up the disadvantages of 
Nature by expedients of Art. The plant never be- 
comes hardy and strong that does not root itself 
amid the breezes of heaven ; so neither does a 
branch of business grow up into self-sustaining and 
vigorous life without the stimulating breezes of 



444 ELEMENTS OF POLITICAL ECONOMY. 

competition. Of this the case in hand affords an 
excellent illustration. For more than a century the 
silk manufacture of England, fenced round and 
protected, as it was called, by these restrictive and 
prohibitory duties, languished, pined, and at times 
almost expired; for the simple reason that the man- 
ufacturers, instead of relying upon their own inven- 
tion, skill, and energy, looked to the government for 
support, and to an artificial monopoly ; and when at 
length in 1826 this foolish system was abandoned, 
and the silk interest was told that it must look out 
for itself, and the ports were thrown open to foreign 
silk, then first the English silk culture began to 
thrive ; it has thriven from that day to this, until 
now we are told that in the plainer and firmer kinds 
of silk the English surpass the French, and that 
there is a considerable exportation of these English 
silks into France itself. 

As an illustration of the mischiefs which the Mer- 
cantile System everywhere introduced into the realm 
of industry, let us look at this instance a little more 
closely. During the continuance of the monopoly, 
the English consumers of silk were obliged to pay 
a very high price for an inferior article. To whose 
benefit did this high price accrue ? It was designed 
to accrue to the benefit of the home manufacturer. 
The sole object in laying the prohibitory duties 
was to prevent importations, and to leave the home 
market entire to the home manufacturer. Precisely 
at this point we see how the whole doctrine of Pro- 
tection grew out of the Mercantile System. The 
Mercantile System wished to repress importations 
for the sake of the balance of trade ; but if needful 



ON THE MERCANTILE SYSTEM. 445 

■articles cannot be imported, they must be made or 
grown at home ; and in order to be made or grown 
at home, the makers or growers must be encouraged. 
The monopoly of the home market was precisely 
this encouragement ; and it is owing to this single 
circumstance that influential classes in every mer- 
cantile community have supposed themselves bene- 
fited by this monopoly, that the doctrine of Protec- 
tion has lingered so long in the general mind. It is 
easy, however, to see that this benefit is in most 
cases wholly imaginary; and that the high prices 
paid by the consumers do not,- on the whole, 
strengthen the manufacture, as has been supposed. 
If the government had gone further, and given 
those who had already commenced the culture of 
silk the monopoly against their own countrymen as 
well as against foreigners, so that nobody could 
engage in the manufacture except those already 
engaged in it, then, indeed, these would grow rich 
at the expense of their countrymen. Government 
would take money out of the pocket of every con- 
sumer of silk, and put it into their pocket, and the 
whole benefit of the high prices would accrue to 
the manufacturers alone. But governments have 
rarely gone so far as this. They have excluded for- 
eign competition, but not prohibited home compe- 
tition ; and the result has been, that the high duties 
which excluded the foreign goods, and the conse- 
quent high prices of the domestic product, have 
drawn many men and much capital into that busi- 
ness, in the hope of an extraordinary profit. The 
business has been artificially stimulated, and capital 
has been thrust into it which would not have gone 



446 ELEMENTS OF POLITICAL ECONOMY. 

of its own accord. The thing has been overdone ; 
and the feverish home competition, in its anxiety to 
reap monopoly prices, has brought down prices far 
below the paying figure. The business has col- 
lapsed from its very inflation ; and thus alternate 
chills and fever have shaken the life out of it. 

But the Mercantile System, and the restrictive 
policy that sprung from it, obtained universal cur- 
rency. The statute-books of every nation in Europe 
are defaced by the absurdest laws and regulations 
respecting manufactures and commerce. It was 
ordered, for exan»ple, by an act passed in England 
in 1678, that all dead bodies should be wrapped in 
woollen shrouds ! This, you must know, was for 
the encouragement of the woollen manufacture ! 

The artisans in the cities and towns were formed 
into guilds, that is, incorporated societies, and to 
each guild was given the monopoly of the market, 
in its branch of industry. No man could practise 
the art of a shoemaker in Antwerp or London with- 
out the consent of the guild of St. Crispin ; and the 
guild itself determined the number of apprentices to 
each artisan, the years he should serve, the condi- 
tions under which he might become a master; in 
short, determined everything respecting the trade by 
constitution and bye-laws. The governments, justly 
regarding these artisans as the most industrious and 
deserving of their subjects, granted them many priv- 
ileges, which, however, were no less contrary to 
sound principles than the rest of the system. That 
they might obtain cheap provisions, the export of 
corn was forbidden ; and thus agriculture was pre- 
vented from selling its products in the best market, 



ON THE MERCANTILE SYSTEM. 447 

wherever that market might be found. That they 
might obtain the raw materials of their manufac- 
tures cheap, the export of these was strictly for- 
bidden. The tanner and currier, for example, must 
sell his product to the " gentle Craft of Leather," 
and had no other market. 

The general doctrine of fostering exportation was 
infringed on in these instances, because it was 
thought that there would be a greater ultimate ex- 
port of manufactured products, if the raw materials 
of these were forbidden to be exported, and cheap 
provisions were secured to the artisans. 

In order to encourage agriculture, most European 
countries, in accordance with the doctrines of the 
Mercantile System, passed corn-laws forbidding the 
importation of foreign grain, each nation wishing to 
raise its own subsistence from its own soil. The 
consequence of this was that the landholders secured 
the monopoly of supplying the home market with 
food ; which of course greatly enhanced the price to 
all consumers, especially in times of scarcity. The 
increased price of bread, which rich and poor m-ust 
pay alike, was but a part of the evil consequences. 
No nation is so sure of its subsistence, when it en- 
deavors to raise the whole of that subsistence at 
home, as when it leaves the channels of importation 
open for foreign supplies. When the trade in corn 
is free, the dearth in one country is instantly sup-, 
plied by the superabundance of another, and that 
by natural laws as beautiful and invariable in their 
operation as the laws that govern the heavenly 
bodies. Interference with natural law in no direc- 
tion is so mischievous and culpable as in this. Is it 



448 ELEMENTS OF POLITICAL ECONOMY. 

not plain to common sense that that nation is most 
likely to obtain its food with regularity and in plenty 
which draws its supplies from the widest surface? 
Massachusetts, for example, does not begin to feed 
her own population ; but does any one suppose her 
people are anymore likely to starve on that account? 
She can buy food with the products of her industry. 
Her calicoes and cassimeres, her hardware and cut- 
lery, her nick-nacks and notions, will buy wheat not 
only in the marts of the West, but in Poland and 
Russia as well. She is sure to be fed, because she 
has wherewithal to buy food ; more sure to be fed 
than if she compelled the industry of her people to 
abandon the more profitable mill-stream and factory, 
shop, and foundry, to extort from these rocky hill-sides 
the reluctant grains. 

England, too, in 1849, removed the last vestige of 
corn-laws from her statute-book, and now imports 
flour freely from the Black Sea and from the Baltic, 
from France and from the United States. Who 
supposes that, if England did not raise a kernel of 
wheat, she would not be as certain of her daily 
bread as the people of Poland or of Michigan? 
But one may say, in case of war, she had better 
raise her food at home. But it is absurd to suppose 
that any nation would be at war with all the world 
at once ; and we may be assured that the portion 
not belligerent would be eager to furnish the sup- 
plies. And besides, plenty of wheat would enter 
England if the English only wanted it, though all 
the navies of the world should blockade the fast- 
anchored isle. Every creek and headland would be 
alive with the silent and secret but busy agents of a 
clandestine trade. 



ON THE MEKCANTILE SYSTEM. 449 

The simple consideration that condemns this sec- 
ond expedient of the Mercantile System, namely, 
the prohibiting the importation of such commod- 
ities as can be produced at home, and the Protective 
policy inseparably connected with it, is, that it in- 
volves a dead loss to the productive powers of the 
world. There is in the world a certain amount of 
capital and a certain amount of industry. These, 
if left to their own keen sense of interest, will make 
the aggregate amount of production in the world as 
great as that amount of capital and industry can 
make it. If, then, a free commerce distribute this 
aggregate production over the earth in accordance 
with the simple law of supply and demand, we shall 
have not only the greatest production, but the most 
perfect distribution. 

• But if now government steps in, and v^^ithdraws 
capital and industry from their freely chosen posts 
of activity, prohibits exchanges that would otherwise 
be made, and commands commodities to be manu- 
factured or grown in localities where they would not 
naturally be manufactured or grown, then certainly 
the aggregate production of the world is lessened, 
and its distribution is less perfect. 

(3.) The Mercantile System had two other expe- 
dients which were frequently employed to subserve 
the ends of its grand principle. For the sake of 
increasing the exports, and thus improving the bal- 
ance of trade, bounties were given to encourage 
the export and sale of native fabrics in foreign 
markets. A bounty, we understand, is a sum of 
money paid outright by the government to the ex- 
porters of native fabrics, in order to enable them 

29 



450 ELEMENTS OF POLITICAL ECONOMY. 

to sell their goods as cheap or cheaper than their 
rivals in the foreign market. England, for example, 
was so anxious to sell her goods to foreigners, that 
she regularly paid her merchants for selling the 
goods at a loss. " The price of these goods in that 
market," says the merchant, ''will not reward my 
capital with the ordinary profit." " Never mind," 
says England, "sell away, and I will make up your 
loss by a bounty!" Was not that a rare and brill- 
iant way of enriching the country ? By natural 
laws, a branch of industry ceases as soon as it be- 
comes unprofitable ; but by the system of bounties 
a trade was perpetuated of which the expense was 
greater than the returns, of which every operation de- 
stroyed a portion of the capital employed in it. The 
loss was made up to the operators by government; 
in other words, the people were taxed to pay it. 

(4.) The fourth and last expedient of the Mer- 
cantile System was to help the balance of trade by 
founding colonies, that the mother country might 
enjoy the monopoly of their trade, and force them 
to resort exclusively to her markets. All the English 
colonies on this continent were bound by the rigid 
fetters of this colonial system. Up to the date of 
American Independence, Virginia and Massachu- 
setts must buy all they wished to buy in English 
markets, and carry all they had to sell to English 
ports. Spain and France extended the same co- 
lonial monopoly, with even more of inflexibility, over 
their American and West India settlements ; and it 
was considerations growing out of this colonial 
policy which gave birth to the American Revolu- 
tion ; and that war was waged not more for the 
interests of humanity than for the freedom of trade. 



ON AMKKICAN TARIFFS. 451 



CHAPTER XV. 

ON AMERICAN TARIFFS. 

So long as the United States were colonies of 
Great Britain, their commerce was bound in the rigid 
fetters of the Mercantile System. We have already 
seen in the last chapter that colonies were one of the 
devices of the Mercantile System to secure a favor- 
able " balance of trade." If the maxim be to sell as 
much as possible and buy as little as possible, then 
colonies, which could be compelled to receive the 
goods of the mother country, must be commercially 
valuable. Accordingly, all the commercial countries 
of Europe, and particularly Spain and England, 
adopted a colonial policy that sprung directly from 
this fundamental maxim. They valued their colonies 
as affording broad markets for the sale of products, 
and also because they could monopolize the articles 
produced by the colonists themselves. In general, 
the colonists were compelled to sell all they had to 
sell to the mother country, and to buy all they had 
to buy of the mother country ; even though the arti- 
cles thus bought were not the produce of the mother 
country, but must first be imported there and then 
exported thence to the colonies. Until the Revolu- 
tion, a Boston ship, for example, could not sail di- 
rectly to China for teas, but the teas must first be 



452 ELEMENTS OF POLITICAL ECONOMY. 

brought to England in British ships, must pay a 
duty there, and then be reexported to the colonies. 

As early as 1650 this monopoly system was en- 
tered' upon by the then republican Parliament of 
England. The colonies had already overcome the 
difficulties incident to their first settlement, had 
begun to increase rapidly in wealth, and their com- 
merce had become so considerable as to afford a 
temptation to restrict its freedom and to endeavor 
to make it peculiarly advantageous to the mother 
country. In the year 1651, the Republican Parlia- 
ment passed the famous Act of Navigation. It had 
a double object, — to promote the interests of English 
shipping, and to strike a decisive blow at the carry- 
ing trade of the Dutch. It prohibited all nations 
from importing into England in their bottoms any 
commodity that was not the growth and manufact- 
ure of their own bountry. In 1660, by a memora- 
ble statute, the ordinance was reenacted, with addi- 
tional clauses, substantially excluding foreign ships 
from American harbors, and sacrificing to English 
monopoly the natural rights of the colonists. 

This Navigation Act is of great interest to Amer- 
icans, because the American Revolution grew directly 
out of it. Says Bancroft, " American Independence, 
like the great rivers of the country, had many sources; 
but the head spring which colored all the stream was 
the Navigation Act." It was enacted that certain 
enumerated articles, which included all the principal 
productions of the colonies, could not be exported 
directly to any foreign country, but must first be 
sent to Great Britain, and there unladen, before they 
could be forwarded to their final destination. It 
amounted to the same thing as prohibiting all exports 



ON AMERICAN TARIFFS. 453 

except to the mother country. The chief products 
of their industry the colonists could not export to 
any place but Great 'Britain, not even to Ireland ; 
neither sugar, nor tobacco, nor cotton, nor wool, nor 
indigo, nor ginger, nor dye-woods, nor molasses, nor 
rice, nor peltry, nor ore, nor pitch, nor tar, nor turpen- 
tine, nor masts, nor yards, nor bowsprits, nor coffee, 
nor cocoa-nuts, nor whale-fins, nor hides, nor ashes. 

Nor was this a]l. England coi>stituted herself not 
only the sole market for American products, but also 
the sole storehouse for American supplies. The 
colonies must not only sell exclusively in British 
markets, but they must also buy exclusively in Brit- 
ish markets. It was enacted, that " no commodity 
of the growth, production, or manufacture of Europe, 
shall be imported into the British plantations, but 
such as are laden and put on board in England, 
Wales, or Berwick-upon-Tweed, and in English- 
built shipping, whereof the master and three fourths 
of the crew are English." 

The preamble to this statute, which was supple- 
mental to the Navigation Act, is curious, and assigns 
as the motive of the restriction, " the maintaining a 
greater correspondence and kindness between the 
subjects at home and those in the plantations ; keep- 
ing the colonies in a firmer dependence on the 
mother country ; making them yet more beneficial 
to it in the further employment and increase of Eng- 
lish shipping and in the vent of English manufaci- 
ures and commodities ; rendering the navigation to 
them more safe and cheap; and making this kingdom 
a staple, not only of the commodities of the planta- 
tions, but also of the commodities of other countries 



454 ELEMENTS OF POLITICAL ECONOMY. ; 

and places for their supply ; it being the usage of 
other nations to keep their plantation-trade exclu- 
sively to themselves." 

In close connection with these commercial restric- 
tions, it was a leading point in the colonial policy to 
discourage all attempts of the colonists to manufact- 
ure for themselves. " That the country which was 
the home of the beaver might not manufacture its 
own hats, no man in the colonies could be a hatter 
or a journeyman at that trade, unless he had served 
an apprenticeship of seven years. No hatter might 
employ more than two apprentices. No American 
hat might be sent from one plantation to another. 
America abounded in iron ores of the best quality, 
as well as in wood and coal ; slitting-mills, steel- 
furnaces, and plating-forges, to work with a tilt- 
hammer, were prohibited in the colonies as nui- 
sances." Similar restrictions existed in respect to 
wool and weaving; no wool, or any manufacture of 
it, could be carried across the line of one province to 
another ; and a British sailor, wanting clothes in a 
colonial harbor, was forbidden to buy there more 
than forty shillings' worth. The liberty of free traffic 
between the northern and southern colonies was 
grudged to the colonists ; and any of the enumer- 
ated articles exported from one colony to another, 
were subjected to a duty equivalent to the duty on 
the consumption of the commodities in England. 

So fully were British statesmen trammelled by the 
ideas of this colonial system, that Lord Chatham 
himself, the best friend the colonies had in England, 
did not hesitate to say from his place in Parliament 
that in a certain probable contingency, he would pro- 



ON AMERICAN TARIFFS. 455 

hibit the colonists from manufacturing even a hob- 
nail or a horseshoe. And Lord Sheffield, at a later 
period, said, " The only use of American colonies is 
the monopoly of their consumption, and the carriage 
of their produce." 

From this degrading commercial vassalage the 
Revolution set us free. You will have observed that 
the economical consideration that condemns the co- 
lonial policy is, that it violates this sound commer- 
cial doctrine, namely, that men should 'buy in the 
cheapest market and sell in the dearest, wherever 
those markets are to be found. If the mother country 
finds it necessary to employ prohibitions to draw the 
colony-trade to herself, it proves that that trade, if 
left to itself, would have found other and more prof- 
itable channels. If Great Britain could have fur- 
nished us with all commodities as cheaply as we 
could procure them elsewhere, then there was no 
need of prohibitions and penalties — we should have 
gone to her of our own accord, as unerringly as the 
needle points to the pole. If she could not furnish 
us as cheaply as others, we were wronged — it was a 
tribute and a tax. She made us buy in a dearer 
market, when a cheaper one was open. 

So, if she could pay as much for our commodities 
as we could get for them elsewhere, there was no 
need of compelling us to sell to her; we should, in 
that case, sell to her inevitably. If she would not 
give what we could get elsewhere, then we were 
wronged ; she made us sell in a cheaper market, 
when a dearer one was open. Her prohibitions then 
were either needless, or they were pernicious. 

But it may be said that our loss was her gain ; 



456 ELEMENTS OF POLITICAL ECONOMY. 

that what we paid extra as consumers, was to them 
extra profit as manufacturers and merchants. But 
where is the justice of taxing one set of subjects or 
citizens for the benefit of another set of subjects or 
citizens ? And how is the wealth of the whole to be 
promoted by a transfer of gains from one part to 
another part? 

A deeper consideration condemns the colonial 
policy. Every country has certain advantages, 
which, if properly improved, enable that country to 
defy the competition of the world in certain branches 
of industry. If England could not sell as cheaply 
as others in the colonial ports, then she was employ- 
ing her capital and labor at home less profitably than 
she might have employed them ; for if she had em- 
ployed them upon those branches of production for 
which she had natural and acquired advantages, no 
nation could have undersold her ; and therefore, if a 
forced market in the colonies encouraged her to con- 
tinue branches of industry that would otherwise have 
been abandoned, it was a permanent loss to her own 
productive power. 

I do not believe that colonial monopolies ever 
enriched a mother country, on the whole. So perfect 
and compensating are economic laws, that the losses 
of one country can never contribute to the permanent 
gains of another. The highest commercial prosperity 
of one country implies and demands a corresponding 
prosperity in other countries. Commerce is ex- 
change. The richer your neighbors are in all prod- 
ucts, the richer you will become by your dealings 
with them. England's hereditary jealousy of the 
prosperity of France has been as economically fool- 



ON AMERICAN TARIFFS. 457 

ish as it has been bitter and persistent. It is true of 
the family of Commerce, as it is of the family of 
Christ, "If one member suffer, all the members suffer 
with it." 

A good commercial system was not one of the 
immediate fruits of the American Revolution. The 
first government established in this country, the gov- 
ernment of the Confederation, which lasted from 
1781 to 1789, was not gifted by the people with the 
power " to regulate commerce." This was one of 
the reserved rights of the States, ^Yhich immediately 
began to use it in accordance with their own views 
of their own interests. Each State laid its owp 
tariff, and undertook to regulate its own trade. The 
results were most disastrous. Great Britain, seeing 
that, as a nation, we were helpless commercially, 
not only refused to negotiate a commercial treaty 
with us, but by an Order in Council, peremptorily 
excluded our ships from her West India possessions, 
between which and the United States there had 
grown up, partly through some relaxations in the 
Act of Navigation, and partly in violation of that 
Act, a large and most profitable trade. We were in 
no position to retaliate. As a nation, we had no 
power to exclude her ships, and thus force her to a 
position of reciprocity. The States passed various 
and conflicting laws. If Massachusetts, for example, 
laid a duty on certain goods, and Rhode Island did 
not, very little revenue would Massachusetts draw 
from that source; the goods were imported into 
Rhode Island, and then smuggled across the border. 
Thirteen independent States regulating the com- 
merce of our seaboard, induced endless confusion, and 



458 ELEMENTS OF POLITICAL ECONOMY. 

there was no power to remedy it. Our commerce, 
such as it was, was ruined. 

To consult upon a remedy for this state of things 
was the specific purpose of the meeting at Annapo- 
lis, in 1786. Alexander Hamilton was there as a 
delegate from New York. He persuaded the dele- 
gates to decline entering upon .the subject of com- 
merce, inasmuch as it was connected with other 
great defects of the Confederation, to which their 
powers did not reach ; and drew up an Address to 
Congress to call another Convention, with ample 
powers to go over the whole ground, and to devise a 
system adequate to the exigences of the country. 

Thus was summoned the Federal Convention of 
1787, which framed the Constitution under which we 
live, and which gave to Congress, that is, the nation, 
the needful power "to regulate commerce." 

The new House of Representatives, under the 
Constitution, commenced at once to discuss and 
frame a uniform national tariff. It passed in 1789 ; 
and, with some modifications and additions passed 
in subsequent years, constituted what I shall call, for 
convenience, the Hamilton tariff. I name it so, be- 
cause Hamilton, as Secretary of the Treasury, made 
an elaborate Report to Congress on the subject, and 
the tariff, as finally adjusted, bore in almost every 
part the impress of his moulding hand. This tariff 
lasted for twenty-five years. It was very successful. 
It admitted the principle of protection, indeed, but 
mainly as subordinate to revenue, and rarely for'its 
own sake, and the general rate of duties laid was 
very low. For instance, in the original bill as passed, 
cotton goods were charged 5 per cent., iron goods 



ON AMERICAN TARIFFS. 459 

71 per cent., and woollens 5 per cent. These du- 
ties were afterwards somewhat, but not largely, in- 
creased.i 

Now under this low tariif the revenue steadly in- 
creased, year by year. There was almost no fluctua- 
tion, but a steady annual growth of income from 

1790 to 1808, when the Embargo was laid, which, of 
course, interrupted everything. During these eighteen 
years, the revenue gradually rose from $4,000,000 in 

1791 to over $16,000,000 in 1808 ; and, what is of 
greater consequence, the ratio of income to popula- 
tion is still more striking. The revenue began at the 
rate of about $1,000,000 to 1,000,000 of people, and 
steadily rose during the eighteen years to about 
$2,500,000 to 1,000,000 of people. 

If now we compare these eighteen years of a low 
revenue tariff with any eighteen years in our after 
history when we have had an avowedly protective 
system, we shall see that in the point of steadiness, 
and especially in the point of a steady increase, those 
eighteen years cannot be matched. They cannot 
be matched even by a comparison with the years 
1846-61, during which we had ostensibly revenue 
tariffs; because although these fifteen years present 
fewer fluctuations than any fifteen years after the 
first, they were undoubtedly less steady in increased 
revenue on account of a scale of duties too high to 
be most productive, and also on account of the in- 
crease of the free list in 1857. Still, a fair compari- 
son of those eighteen years, and these fifteen years, 
with the years intervening, and with the years subse- 
quent to 1861, v/ill yield all that is claimed in respect 

1 Hildreth's United States. 



360 ELEMENTS OF POLITICAL ECONOMY. 

to the superiority of low revenue over protective 
tariffs in point of a steady and increasing customs' 
income. 

But while I praise the Hamilton tariff, in compar- 
ison with those that came after it, I do not forget 
its defects. It boiTowed from the old Navigation 
Act of England, and made unwise discriminations 
between foreign bottoms and American ships. Du- 
ties were 10 per cent, higher on goods imported in 
foreign ships. Tonnage was 6 cents per ton on 
American ships ; 30 cents per ton on ships Ameri- 
can-built but owned by foreigners ; and 50 cents per 
ton on all others. These discriminations were de- 
signed to encourage the building of American ships, 
and to keep the carrying trade both coastwise and 
oceanwise to American bottoms. But it cannot be 
wise to put obstacles in the way of foreigners coming 
to our ports to trade. Neither do sound principles ap- 
prove even the moderate margin yielded in this tariff 
to protection. The duties indeed were low, — they 
were scarcely a burden upon industry, — but neither 
on the other hand did they aid it. All above the best 
revenue figure was needless. If, with the great advan- 
tage of being able to escape the costs of transporta- 
tion, together with the abundance of raw material, 
and the endless resources of agriculture, any branch 
of industry could not live without artificial help, then 
the proof is complete that it ought not to have been 
entered upon, and could not have been prosecuted, 
except at a permanent loss. 

Our second tariff, passed in 1816, I shall designate 
as the Calhoun tariff. Then first we entered upon 
the protective system as such ; and it is a curious 



ON AMERICAN TARIFFS. 461 

instance of how times change and men change with 
them, that Mr, Calhoun, who afterwards became the 
champion of Free Trade, strenuously advocated this 
tariff, while Mr. Webster as strenuously opposed it. 
Till then the tariff question formed no element in 
our politics ; if I may say so, nobody knew that we 
had any tariff unless he chanced to read the statute- 
book ; and it was an evil day for this country when 
a purely scientific question became mixed up in 
passions and politics, and adhesion, on one side or 
the other, to what not one voter in a thousand ever 
began to comprehend, was made a test of party. 
From that day to this, no tariff question has ever 
been decided on its merits. Interests, sections, 
passions, have influenced every bill ; and it is a part 
of the punishment, I believe, for prosecuting an arti- 
ficial and false system in any department, that it is 
hard work to get out of it. New England generally 
opposed the Calhoun tariff, and the principle of pro- 
tection embodied in it; so did a majority of the 
Southern members ; but South Carolina, seeing the 
growing value of cotton, and anxious for a home 
market for the raw material, united with Pennsyl- 
vania and the Middle States in securing the high 
duties, especially upon cottons and iron. The duties 
were increased, on an average, 42 per cent, above 
the old rates preceding the war. Imported articles 
were divided into three classes : 1st, Those of which 
a full domestic supply could be produced ; 2d, 
Those of which only a partial domestic supply could 
be afforded ; and 3d, Those produced at home 
very slightly, or not at all. On the first class, the 
duties were fixed substantially at 35 per cent, ad 



462 ELEMENTS OF POLITICAL ECONOMY. 

valorem. On the second class, including cottons and 
woollens, the duties were 25 per cent., to be reduced 
after three years to 20 per cent. On the third class 
the rates were mostly fixed with a view to revenue 
only. 

In connection with the tariff, we copied again, and 
more largely, from the English Navigation Act. Im- 
portations by foreign ships were limited to the prod- 
uce of their respective countries ; and the coasting- 
trade, hitherto open to foreign vessels, was now re- 
stricted to those American owned and built. In one 
word, we entered fairly and squarely upon the career 
of restriction. 

Our third tariff, that of 1824, we may call, if we 
please, the Clay tariff. That gentleman, though 
Speaker of the House at the time, took an earnest 
part in the debates, and was regarded as the most 
prominent advocate of what then first began to be 
called the " American System," that is, the system 
of high protective duties. Mr. Webster still opposed 
this system, made an elaborate speech in reply to 
Mr. Clay, and voted against the bill. 

The bill increased the duties on protected articles 
very considerably ; and is an excellent proof that 
interests that are petted, and legislatively protected, 
do not long remain satisfied with what they receive, 
but are soon clamorous for more protection. The 
Calhoun tariff gave these interests large protection , 
eight years run on, and they call for more ; they get 
it. Are they satisfied ? Why should they be ? In- 
stead of being taught to rely upon themselves, they 
have been taught to lean upon the government. Cer- 
^inly they will ask for more still. 



ON AMEKICAN TARIFFS. 463 

Four years after the Clay tariff, that is in 1828, was 
passed the " Tariff of Abominations," so called, in 
the politics of the time. The manufacturers of 
course had asked for more protection ; but the oppo- 
sition to the system was now strong ; it could not 
prevent the passage of the bill, but it loaded it down 
with all manner of objectionable features, to make it 
as distasteful as possible to its advocates. A political 
design to make the protective system unpopular 
appeared, and was indeed avowed ; but the friends 
of protection, in view of the higher duties on many 
articles, came to the conclusion to support the bill 
notwithstanding its odious features. They swal- 
lowed the whole with the best grace they could. 
Daniel Webster, after strenuous but fruitless efforts 
to reduce its " abominations," for the first time in his 
life voted for a bill involving the principle of high pro- 
tective duties. This was in John Quincy Adams's 
administration. 

Four years later Mr. Clay went into the Presi- 
dential canvass against General Jackson upon the 
avowed platform of protective duties. He was 
beaten. The country seemed to indicate its prefer- 
ence for another system ; and accordingly in 18B3 our 
fifth tariff, called the " Compromise tariff," became 
a law. It adopted a sliding scale in reference to all 
duties that were over 20 per cent., providing for their 
gradual reduction on each alternate year, till 1842, 
when and thereafter the uniform rate on all these 
goods should be 20 per cent, on the home valuation. 
Mr. Clay himself brought forward this bill as a "com- 
promise ; " it was approved by Mr. Calhoun, and it 
passed both Houses by decided majorities. 



464 ELEMENTS OF POLITICAL ECONOMY. 

During the next nine years the attention of the 
country was occupied by the greai questions of a 
National Bank and the currency. On these and other 
questions the administration of Van Buren became 
unpopular and broke down ; and the Whig party, 
coming into power, passed what I shall call the 
" Whig tariff" of 1842. It was a high protective 
tariff. Extravagant expectations were entertained in 
regard to it in the high political excitements of the 
time. Under it, millions of capital were seduced into 
manufactures, particularly of iron; and when the high 
duties were abolished, as they were a few years later, 
hundreds and thousands of persons were pecuniarily 
ruined. It is impossible to speak in terms sufficiently 
deprecatory of an artificial system that inveigles 
capital and laborers into branches of industry in 
which they never would have embarked of their own 
accord. Our whole course of legislation on this sub- 
ject cannot be properly characterized in terms of 
respect. Congress has alternately inflated, and then 
punctured, the bubble. Nothing injures commerce so 
much as to tinker it. A constant changing of the 
terms on which foreigners are permitted to trade with 
us disgusts them and injures us. Even a bad tariff 
persisted in, is a good deal better than a series of 
good and bad ones together. 

In 1846 was passed what we will call the " Walker 
tariff," from Robert J. Walker, then Secretary of the 
Treasury. It reduced the duties on imports down to 
about the standard of the " Compromise " of 1833. 
It discriminated however, as the Compromise did not, 
between goods that could be produced at home and 
those that could not. It approached, in short, more 



ON AMERICAN TARIFFS. 465 

nearly than any other, in its principles and details, to 
the Hamilton tariff, although the general rate of 
duties was higher. From that time up to 1857, there 
was a regular and large increase in the amount of 
dutiable goods imported, bringing in a larger revenue 
to the government. The surplus in the treasury 
accumulated, and large sums were expended by the 
government in buying up its own bonds at a high 
premium, for the sake of emptying the treasury. 
Under these circumstances the "tariff of 1857" wms 
passed, decidedly lowering the rates of duties, and 
largely increasing the free list. The financial crisis 
of that year diminished the imports, and the reve- 
nue fell ofi" $22,000,000. It rallied, however, the 
next two years, but owing to the large increase in 
the free list, not quite up to the old point. 

It only remains to speak of the " Morrill tariff" 
of 1861. I include under that designation, as pre- 
viously under the designation of the Hamilton tariff, 
the various supplements and modifications passed in 
accordance with the leading idea of the original act. 
So reckoned, the Morrill tariff is the ninth in order. 
The difficulties growing out of the war ostensibly 
united all parties in the view of obtaining, if possi- 
ble, more revenue to the government ; but there was 
no agreement as to the means by which more rev- 
enue could be obtained ; and the protectionists in 
Congress seized the opportunity of the withdraw- 
ment of the Southern members for discriminating in 
favor of the articles in which they were interested 
even to the extent of diminishing the revenue by 
very high duties which lessened importations. They 
did this too without any general popular call for such 

30 



466 ELEMENTS OF POLITICAL ECONOMY. 

a step. The people had deliberately and repeatedly 
indicated their preference for the system of low du- 
ties. The policy of the country was supposed to be 
settled in that direction. There was indeed a mildly 
drawn resolution in the political platform of the party 
that triumphed in 1860 in favor of what is called pro- 
tection ; but very little, or nothing, was said upon 
that subject in the canvass ; the people pronounced 
in their verdict upon a totally different set of ques- 
tions from those involved in a protective tariff. 
When, therefore, the congressional protectionists, 
availing themselves of the absence of the represent- 
atives of one third of the States, availing them- 
selves also of the indignation against England on 
account of the indecent haste with which she had 
recognized the insurgents as belligerents, sprung a 
highly restrictive tariff upon the country, they did it 
in obedience to no general call, and with little refer- 
ence to the general welfare. At the moment when 
the great need of the government was revenue, they 
apparently paid little attention to the question how 
the revenue could be increased, but on the one hand 
they put more articles on the free list, and on the 
other put the duties on protected articles so high 
that the masses of the people have been obliged to 
pay nearly double on some of the necessaries of 
life what the goods were worth in a free market; 
and put, too, the duties so high also that nothing 
like the revenue has been received from them that 
might have been received. With double the revenue 
in gold, and a people obtaining their cloths and iron 
and other similar goods at something near European 
or Canadian prices, the credit of the government 



ON AMEKICAN TARIFFS. 467 

would not have sunk so low as unfortunately it did 
sink. The new tariff was not honestly adjusted ft)r 
purposes of revenue ; and while it seemed to concede 
something in its free list to the growing demand for 
free trade, the concession was largely delusive, since 
the articles thus admitted free of duty go into manu- 
factures protected by higher duties than have ever 
been levied in this country. To put articles on a free 
list is of itself no boon to free trade ; it depends upon 
the purpose for which they are put there ; whether to 
benefit the whole people or only a few persons at the 
expense of the whole people. A large free list along- 
side of such duties as disfigure the Morrill tariff is a 
snare for the unwary. The present duties are very 
much too high, and many things are exempted from 
duty which, probably, ought to pay duty for the sake 
of revenue. Besides this, whoever will carefully con 
the provisions of the various tariff bills now in force 
will find them as full of iniquity as an egg is full of 
meat. In proof of this, let a specimen or two suffice. 
The supplemental act, that went into operation on 
the 10th of August, 1866, provides, for the sake of 
increasing the duties, that the costs of transportation, 
shipment, commission, brokerage, and all similar 
charges, be added to the invoice value of imports 
to make up the value on which the duties shall be 
levied. This applies to all dutiable imports, except 
to long-combing' or carpet wools costing twelve cents or 
less ]Der pound. Why are they excepted ? Cannot 
the carpet manufacturers pay duties as well as other 
people ? They have a very high protective duty on 
their own completed product. They compel, through 
Congress, everybody to pay this duty on foreign car- 



468 ELEMENTS OF POLITICAL ECONOMY. 

pets, and carry up the price of their own in propor- 
tion ; and yet this tariff exempts their raw material 
from an increase of duty applied to all other dutiable 
goods whatsoever ! Ten days before this clause went 
into effect, the Hartford Carpet Company declared a 
semi-annual dividend of 20 per cent. ; and its shares 
were announced as worth $275 each, with the divi- 
dend off The manufacture of carpets in this coun- 
try is properly and sufficiently encouraged by patent 
rights in the machinery by which they are woven ; 
and yet, the present rates of duty on foreign carpets 
are from 35 cents per square yard to 80 cents per 
square yard. On one variety the duty is 50 per 
cent, ad valorem, and on others, not otherwise speci- 
fied, 40 per cent. 

Let us look at another specimen. The accumu- 
lated duties on spool-cotton are equivalent to 70 per 
cent, ad valorem. Every family in the land, every 
seamstress, every poor widow, has been taxed at 
least 70 cents on each dollar's worth of cotton-thread. 
What for? The very few establishments in this 
country that make spool-cotton, are said by compe- 
tent witnesses to have been realizing extraordinary 
profits. One would suppose they might realize them, 
I do not know what other people think about such 
thinsfs as these. I know what I think about them. 
The duties on white paper are so high that every 
man's book, and every man's newspaper, come to him 
at a cost enhanced artificially, unnecessarily, preju- 
dicially to the interests of general intelligence. So 
of other things too many to be recounted. In the 
early Spring of 1867, a special tariff, applicable to 
wools and woollens, was passed. It was expected to 
benefit the wool growers and the woollen manufac- 



ON AMERICAN TARIFFS. 469 

turers. It raised still higher the duties on woollens, 
which were enormous before. The results have 
stumbled the advocates of protection. Wool has been 
lower, and wool manufacturing flatter, than almost 
ever before. Natural laws know how to take their 
revenges. What manufacturers need is a steady and 
widening market, at such prices as the people can 
afford to pay. Statute law is powerless in the long 
run to compel people to buy inferior goods at prices 
artificially made high. I have been lately told by 
two merchant tailors, both of them doing a large 
business in different parts of the country, that nine 
tenths of all the cloths they sell are foreign cloths. 
Why is this ? Because many people prefer to pay 
even the enormous duties in gold, and get an honest 
article, than to take the inferior domestic goods. 
Just as good cloth can be made in this country as can 
be made anywhere ; and the only reason why it is not 
made is, that the makers rely on government to secure 
to them a compulsory market for goods of inferior qual- 
ity. What the people want is just what protection- 
ists do not want, that is, goods both cheap and good. 
There is no longer any doubt, however, that the 
American people will soon shake off all such tram- 
mels on commerce as those which the Morrill tariff 
imposes. To this most desirable end that tariff has 
itself powerfully contributed. Its inconsistencies and 
abominations are too great to bear the light in this 
year of grace, 1868. Says Mr. Wells, Special Com- 
missioner of the Revenue, in his report of January, 
1868, " the duties on some classes of products for- 
merly of extensive importation are at present all but 
prohibitory." The same authority informs the coun 



470 ELEMENTS OF POLITICAL ECONOMY. 

try that on the total imports of 1867, the duties 
amounted to 42.79 per centum. Deducting for free 
goods, the average duty on dutiable goods for 1867 
was precisely 47.33 per centum. For 1866, it was 
exactly 48.58 per centum. So that, for every dollar's 
worth imported from abroad, on which any duty at 
all is charged, we pay almost fifty cents in gold as 
import tax. From 1857 to 1861, the average duty 
on dutiable goods was 20^ per cent. Under the 
Walker tariff it was 24^ per cent. ; under the Whig 
tariff 33 per cent. ; under the Compromise 31|^ per 
cent; under the tariff of "Abominations" 41^; under 
the Clay tariff 38^ per cent. ; and from 1821 to 1824 
34^. I doubt if the average under the Hamilton 
tariff was over 15 per cent. ; and I am perfectly clear 
that if our maximum duty were 10 per cent, it would 
be as decidedly for the interest of the revenue as it 
would undoubtedly be for the interest of the whole 
industry of the country. Even in 1808, the revenue 
from customs was $2,500,000 to 1,000,000 of people. 
What with our new industries, new facilities for 
transportation, new advantages of every name, at 
the present day, we could doubtless, with duties 
lower than ruled then, have $200,000,000 a year from 
customs. 

To say that our present tariff, that lays an average 
of almost 50 per cent, on every dutiable import, is 
productive^ is only to say that it is hard work to de- 
stroy the commerce of a great people. Of course, 
if the people trade at all, such a tariff will be pro- 
ductive ; about one half of the value of the dutiable 
goods imported goes direct to government! Let us 
msike the trial, and see if a reasonable system would 



ON AMERICAN TARIFFS. 471 

not be even more productive ! Our tariff produced 
in round millions of dollars, in 1862, 49; in 1863, 
69 ; in 1864, 102 ; in 1865, 85 ; in 1866, 179 ; in 
1867, 176 ; in 1868, 164 ; and it is estimated by the 
Bureau of Statistics, that the product for 1869 will 
not be over 150. 

The progress made towards a better public opinion 
on this matter of duties is very cheering. Light is 
breaking in. These late spasms of the exploded 
theory of protection are likely to end in its death- 
rattle. Protection has always been bold in its de- 
fiance of common sense ; but the audacity that 
tempted it to run a tilt with the nineteenth century 
in an enlightened country, overleaped itself. The 
present tariff rests on false principles throughout, and 
it cannot, therefore, be permanent. To relax com- 
mercial systems, and not to restrict them, is alone in 
accordance with the spirit of this age. 



472 ELEMENTS OF POLITICAL ECONOMY. 



CHAPTER XVI. 

ON TAXATION. 

If the general views maintained throughout this 
book are conceded to be correct, we shall now reach 
with very little difficulty the true principles of taxa- 
tion. Value resides in services exchanged ; and since 
government is an essential prerequisite to any general 
and satisfactory exchanges, since it contributes by 
direct effort to the security of person and property, 
it justly claims from every citizen in return a com- 
pensation for the service thus rendered to him. I 
do not mean to say that government exists solely for 
the protection of person and property, or that all the 
operations of government are to be brought down 
within the sphere of exchange ; government exists 
as well for the improvement as for the protection of 
society, and many of its high functions are moral, to 
be performed under a lofty sense of responsibility to 
God and to future ages; but the matter of taxation, 
by which government is outwardly supported, and 
by which it takes to itself a part of the gains of every 
man's industry, seems to me to find a ready and 
solid justification in the common principles of ex- 
change. A tax paid is a reward for a service ren- 
dered ; and because the service may have respected 
another generation as well as the present, it is pos- 



ON TAXATION. 473 

sibly proper that the tax also shall be passed over 
in part to another generation to pay. The services 
which government renders to production by its laws, 
courts, and officers, by the force which it is at all 
times ready to exert in behalf of any citizen or the 
whole society when threatened with evil, are rendered 
somewhat on the principle of division of labor, one 
set of agents devoting themselves to that work ; and, 
notwithstanding some crying abuses of authority 
which no constitution or public virtue have yet been 
found adequate wholly to avert, are rendered on the 
whole economically and satisfactorily. Taxes, there- 
fore, demanded of citizens by a lawful government 
which tolerably performs its functions, are legitimate 
and just on principles of exchange alone. 

The questions now arise, in what proportions shall 
the citizens contribute to the fund necessary to be 
raised by taxation? And in what manner shall these 
contributions be paid? 

The common notion has been that, since every 
man's person is supposed to be equally protected by 
the government, a uniform poll-tax assessed on all 
citizens alike is right, and that for the rest, a man 
should be taxed according to his property. But what 
is property ? No word has received a greater variety 
of definitions, or is less settled in definite meaning 
in the minds of men. The lawyers make a distinc- 
tion between real property and personal property; 
and the law at present, though a man have neither 
real estate nor movables, yet taxes him on his income, 
on the rewards of his daily industry, regarding that 
as a species of property. And this too is just; be- 
cause, as I think, the ultimate idea of property is the 



474 ELEMENTS OF POLITICAL ECONOMY. 

power and right to render services in exchange. 
Robinson Crusoe, while solitary upon his island, did 
not and could not have property, in the true sense 
of that word. It is not the fact of appropriation that 
makes anything property ; it is not the fact that a 
man has made it or transformed it, that makes any- 
thing property ; it is not the fact that a man may 
rightfully give it away, that makes anything prop- 
erty ; but it is the fact that a man has something, no 
matter what it is, for which something else raiay be 
obtained in exchange, that makes that something 
property, and gives government the right to tax it. 
In other words, property consists in values, in a pur- 
chasing-power, and not in possession, or in appropri- 
ation, or in the esteem in which a man holds any- 
thing he has as long as it is his own. The test of 
property is a sale ; that which will bring something 
when exposed for exchange is property ; that which 
will bring nothing, either never was, or has now 
ceased to be, distinctively property. This view may 
not seem to be as novel as it is, or it may be preju- 
diced by its very novelty, but at any rate it carries 
along with it that strongest of the criteria of truth, 
that it simplifies and illumines a confused section of 
the field of human thinking ; and at the same time 
justifies a practice which governments have reached, 
as it were through instinct, but which is continually 
a subject of cavil and complaint, the practice, name- 
ly, of taxing men who have neither real estate nor 
chattels, on their incomes from industry. Within a 
month an intelligent man was heard to inveigh 
against the injustice of the law which taxes the in- 
dustrious man who works and gains an income, but 



ON TAXATION. 475 

takes little or nothing from the man unable or too 
lazy to work. Nevertheless the law is right in its 
action, and my neighbor was wrong in his strictures. 

To the general question, then, in what proportions 
shall the citizens contribute in taxes to the support 
of government, the general answer comes, that they 
ought to contribute in accordance with the value of 
the services which they either do or might render to 
their fellow-citizens. Under the expression " might 
render " is not included any personal services not 
actually rendered, but only those forms of material 
property which might be exchanged for other forms 
if the owner saw fit to exchange them, but which he 
prefers for the present to keep in his own possession. 
It would not be fair, for example, to tax a profes- 
sional man on services which his neighbors, or any 
other authority, think he might render, were he less 
indolent or more capable ; but it is fair to tax any 
man on those forms of material property in his pos- 
session with which he may at any time he chooses 
render services in exchange. The right to tax on the 
part of the government is connected with the right to 
exchange on the part of the citizens, grows out of 
this, and is limited by it. This consideration, though 
it may exclude the propriety of a poll-tax, is consist- 
ent with all other forms of taxation, and gives unity 
to them. 

I do not think that the common sense of mankind 
falls in with the opinion ably advocated by Mr. Mill 
and others, that persons of a large property or of a 
large income should pay taxes higher than the due 
proportion of their properties or incomes to more 
moderate properties or incomes. The transaction 



476 . ELEMENTS OF POLITICAL ECONOMY. 

between the government and a tax-payer is itself a 
kind of exchange, and if the ground of it be, as I 
think it is, that government facilitates by way of pro- 
tection all his other exchanges, then ought he to pay 
taxes proportionably to the amount of his exchanges 
actual or possible; and a man should pay on an 
income of $10,000 ten times as much, and no more, 
as a man with an income of f 1000. Mr. Mill re- 
gards equality of burden as the true general princi- 
ple of taxation ; and as a rich man can pay more 
than his proportional share with perhaps less sacrifice 
than the poor man, therefore he ought to pay more 
than his proportional share. This principle, formerly 
embodied in the United States income law, has now 
been discarded from it; and a uniform tax of five 
per centum is laid on the excess of incomes over 
$1000. The present law seems fairer than the pre- 
vious law in this respect. There are, however, de- 
ductions allowed in the present law at variance with 
its fundamental principle. Certainly taxes ought to 
be laid on equal and equitable principles, but the 
difficulty of determining for different classes of citi- 
zens what would be an equality of burden is so 
insuperably great, that one hesitates before accepting 
it as the true principle of taxation. On the whole, 
I am clear that the best available guide in practical 
taxation are these simple principles, that property is 
essentially a power to render services, and that tax- 
ation should be as nearly as possible proportionate 
to the degree of this power. 

If, then, taxes are to be laid on services, thus sub- 
tracting a portion from the gains. which accompany 
them, the question now arises in what way are they 



ON TAXATION. 477 

to be laid ? They are commonly divided into two 
classes, direct and indirect. A direct tax is levied 
on the very persons who are expected themselves to 
pay it; an indirect tax is demanded from one person 
in the expectation that he will pay it provisionally, 
but will indemnify himself in the higher price which 
he will receive from the ultimate consumer. Thus 
an income tax is direct, while duties laid on imported 
goods are indirect. There has been a great amount 
of discussion on the point whether direct or indirect 
taxation be the more eligible form ; but the reader 
of penetration will perceive that there is not at bot- 
tom any very radical difference between them ; each 
is alike a tax on actual or possible exchanges, with 
this main difference, that men pay indirect taxes as 
a part of the price of the goods they buy, without 
thinking perhaps that it is a tax they are paying, and 
consequently without any of the repugnance that is 
sometimes felt towards a tax-gatherer who comes 
with an unwelcome demand. Thus indirect taxes 
are conveniently and economically collected. Espe- 
cially is this true of impost duties ; since one set of 
custom-house officers collect easily and at once the 
government tax which is ultimately paid by con- 
sumers all over the country. The taxes for licenses, 
the taxes on telegraph and railroad companies, and 
very many others levied by the present United 
States internal revenue law, are indirect taxes, where- 
by the government gets in a lump what is afterwards 
distributed over many subordinate exchanges. The 
countervailing disadvantage of indirect taxation, how- 
ever, is, that the price of the commodity is usually 
enhanced to an extent much beyond the amount of 



478 ELEMENTS OF POLITICAL ECONOMY. 

the tax, partly because it is a cover under which 
dealers may put an unreasonable demand, and partly 
because the tax, having to be advanced over and 
over again by the intermediate dealers, profits rapidly 
accumulate as an element of the price. 

Direct taxes are laid either on income or expendi- 
ture. An income tax, if the exact amount of income 
could in all cases be ascertained, would be a perfectly 
unexceptionable form of taxation. The only sources 
of income are three : wages, profits, rents. I do not 
think that gifts are legitimately taxable ; they lie out- 
side the field of exchange ; they spring from sympa- 
thy, from benevolence, from duty ; and while ex- 
change must claim all that fairly belongs to it, it 
must be careful not to throw discouragements into 
the adjacent but distinct field of morals. Hence, it 
may well be questioned whether legacies, bequeath- 
ments, gifts to charitable and educational institu- 
tions, and gifts to individuals proceeding from friend- 
ship, gratitude, or other such impulse, are properly 
subject to taxation. The property is taxable in the 
hands of the donor, and may be in the hands of the 
recipient, but the passage from one to the other ought 
to be unobstructed by a tax. Gifts then excepted, 
and plunder, which is out of the question, the sources 
of income are few and simple, and there is no great 
difficulty in every man's ascertaining about what his 
annual income is. Fraudulent returns should be 
promptly punished by an additional assessment and 
collection. The income law at present in force in 
the United States has perhaps been subject to less 
complaint than the manufacturers' tax, and other 
forms of indirect taxation ; and it might become more 



ON TAXATION. 479 

and more productive every year, as the forms are per- 
fecied, and as the memory and conscience of the pay- 
ers are quickened by the action of a healthful public 
opinion brought to bear through the very proper 
annual publication of the list of their returns. 

The other direct taxes are on expenditure of some 
special kinds, such as those on horses, carriages, 
watches, plate, and so on, kept for personal use. As 
the difficulty of a tax on a person's whole expenditure 
is much greater than one on his whole income, inas- 
much as the items are more numerous and more 
diffused, it is only attempted to lay a few taxes on 
some peculiar items of expenditure, such as those 
above mentioned ; but as these do not reach all per- 
sons with any degree of equality, they are so far 
forth objectionable. A house - tax, levied on the 
occupier, and not on the owner unless he be at the 
same time the occupier, would be a direct tax on 
expenditure every way unobjectionable.^ Taking 
society at large, the house a man lives in and its 
furniture are probably the most accurate index attain- 
able of the size of his general expenditures. They 
are open to observation and current remark ; they are 
that on which persons rely more perhaps than on 
anything else external for their consideration and 
station in life ; the tax could be assessed with very 
little trouble on the part of the assessor; and it is 
well worthy the attention of our national legislature, 
whether such a tax, if more taxes should be needed, 
would not be more equal and more easy of collection 
than any others now open ; or whether it might not 
with advantage take the place of some of the com- 

iMiU, Chap. III., Book 5. 



480 ELEMENTS OF POLITICAL ECONOMY. 

plicated and objectionable taxes now laid. Direct 
taxes have this general advantage over indirect, that 
they bring the people into more immediate contact 
with the government that lays the taxes, and subject 
it to a quicker supervision and more effectual curb, 
whenever its expenditures grow larger than the peo- 
ple think it desirable to incur; they have this general 
disadvantage over indirect taxes, especially over im- 
posts, that the nuniber of officials required to assess 
and collect them is much larger, thus swallowing up 
a part of the proceeds of the taxes, with this liabil- 
ity also of bringing the people into an attitude of 
hostility to the government and to its contemplated 
expenditures. But whether the taxes be direct or 
indirect, or whatever be their form, except it be a poll- 
tax, which is questionable at best, they are laid upon 
exchanges, and are designed to withdraw for the use 
of the government a part of the gains of exchanges. 
From this point of view, which gives unity to the 
whole field of taxation, some practical hints may 
usefully conclude this discussion and this volume. 

(1.) Under the principle, it is very clear that credits 
are a legitimate subject of taxation. Whatever is 
bought and sold is properly enough taxed, if the 
needs of the government require it, and if such tax- 
ation would be productive and not too unequal. As 
values always spring from the action of individuals, 
so the incidence of taxes is upon persons rather than 
upon things ; and the question is what can a man 
sell, or what has he already sold, on the gains of 
which sale the government may lay some claim ? 
If I have a mortgage on my neighbor's farm, I can 
sell it at any time to a third party ; it pays me in- 



ON TAXATION. 481 

terest ad interim, and I can collect it at maturity. 
Government therefore properly taxes me for that 
credit in my possession. It is a part of ray property. 
The holders of the government bonds occupy an 
economical position exactly similar. They have a 
lien on the national property and income. The 
credits they hold are vendible commodities. They 
are a paper bearing interest. They can be collected 
at maturity. They are indeed exempted bylaw frpra 
municipal and State taxation. That was a legitimate 
inducement held out to everybody alike to invest in 
the bonds. But there is no reason why the nation, 
having withdrawn them from town and State taxa- 
tion, should not itself all the more subject them to 
their fair share of the national burdens. The income 
derived from them should be taxed as highly as afty 
other income. It is no longer any ground of merit, 
even if it ever has been, for persons to buy the gov- 
ernment debt. It is a mercantile transaction, and 
should be so considered in relation to taxes. So of 
other mercantile credits. They are taxable. 

(2.) A man's annual income, exactly ascertained, 
exactly measures the aggregate of the gains of his 
exchanges for that year ; and, therefore, under the 
principle, an income tax is the fairest of all forms of 
taxation, and may perhaps, in time, be made to su- 
persede all others. An income tax is new in this 
country, and there are many difficulties in inaugurat- 
ing a new kind of tax ; but these difficulties are wear- 
ing away, and the income tax has become very pro- 
ductive. For 1864, it was |14,919,279 ; for 1865, 
120,567,350 ; for 1866, $60,894,135.1 The income 

1 Eeport Commi?sioner Internal Revenue, Dec. 1866. 
31 



482 ELEMENTS OF POLITICAL ECONOMY. 

tax is unpopular in England, partly on account of 
the inequalities in the law itself, and partly for rea- 
sons less applicable to us in a democratic form of 
society. The publicity resulting is no objection at 
all ; inasmuch as every man has a right to know that 
his neighbors are contributing to support the govern- 
ment pro rata with himself. In bearing up the bur- 
den of government all citizens are copartners, and in 
this view each has a right to demand a look into the 
books of the others. 

(3.) Taxes in general, in order to be most pro- 
ductive in the long run, as well as discourage as little 
as possible the exchanges which would otherwise go 
forward, ought to be low relatively to the amount of 
■walues exchangeable. A high tax not infrequently 
stops exchanges in the taxed articles altogether, and 
of course the tax then realizes nothing to the govern- 
ment. As the only motive to an exchange- is the 
gain of it, the exchange ceases whenever the govern- 
ment cuts so deeply into the gain as to leave little 
margin to the exchangers. The greater the gain left 
to the parties, after the tax is abstracted, the more 
numerous will the exchanges become, and the greater 
the number of times will the tax fall into the coifers 
of the government. In almost all articles, consump- 
tion increases from a lowered price in even a greater 
ratio than the diminution of the rate of tax ; so that 
the interests of consumers and of the revenue are 
not antagonistic but harmonious. On articles of 
luxury and ostentation, and on those, such as liquors 
and tobaccos, whose jnoral effects are clearly ques- 
tionable, very high taxes may properly enough be 
laid, because their incidence will hardly tend to di- 



ON TAXATION. 483 

minish consumption, and it would scarcely be to be re- 
gretted if it did ; but with this exception, duties and 
taxes should be levied at a low rate per cent., as well 
for the interest of revenue as of consumers. It is to 
oe added, however, that the taxes even on these arti- 
cles may be too high to meet either a revenue or a 
moral purpose. The internal tax of two dollars a 
gallon upon distilled spirits was of this character. 
Experience has demonstrated that a less tax will pro- 
duce more revenue, and the drinking of whiskey, bad 
as that is, is less culpable than the endless frauds on 
the government provoked by the high tax. 

(4.) Duties and taxes should be simple, and their 
amount easily calculable by the payer beforehand. 
The complication of specific with ad valorem duties is 
a decided objection to the present tariff. The latter 
is a duty of so much per cent, on the invoiced or ap- 
praised value of the goods : the former is a duty of so 
many cents or dollars on the pound, yard, gallon, or 
other quantity. There are too many practical diffi- 
culties connected with either form of duty to make 
it proper to combine the two upon the same article. 
To combine them thus is one of the devices of pro- 
tection. On the whole, specific duties are preferable 
to ad valorem because they give less chance to frauds, 
and because importers, and others, can make their 
calculations easier on the basis of them. To be sure, 
this involves that high-priced grades of an article pay 
no higher tax than low-priced grades of the same; 
but this consideration is largely overbalanced by those 
of convenience and productiveness. Teas are taxed 
in this way both in England and the United States, 
in the former Is. 6d. per pound, and in the latter 25 



484 ELEMENTS OF POLITICAL ECONOMY. 

cents per pound. If these rates were considerably 
reduced, there is little doubt that the consumption 
of teas in both countries would so increase, that the 
revenue from them would soon be greater than it is 
now. The present duty is probably 100 per cent, on 
the average value of the teas in bond in London and 
New York.i The tax on cigars at present in this 
country is a good instance in point of the superior 
efficacy of simple taxation. Under the sliding scale 
of 1864, the receipts were small and the frauds gigan- 
tic : under the uniform rate of ten dollars a thousand 
the receipts increased; the rate has been since re- 
duced to ^5.00. So far as is possible, taxes should 
be levied upon commodities once for all, and then an 
end. The opposite principle of taxing commodi- 
ties every time they change hands throws an in- 
definite burden on exchange, whose weight cannot 
well be calculated beforehand, either by the consumer 
or by the government, through uncertainty as to the 
number of transfers. Exchanges indeed are the only 
legitimate subject of taxation, but not every specific 
and subordinate exchange. An attempt to tax aU 
sales whatever was followed in Spain, and will be 
followed everywhere, by a sluggish indisposition to 
trade at all. Let the amount of the tax be definite, and 
let everybody be sure that when it is once paid gov- 
ernment will produce no further claim, and industry 
will go along under heavy taxes better than under 
those nominally lighter to which uncertainty as to 
time or amount attaches. All the more advanced 
governments have been simplifying of late years 
their systems of taxation, and collecting their revenue 

1 Sir Morton Peto on Taxation. 



ON TAXATION. 485 

at fewer points, and under more tangible conditions, 
in order to interfere as little as possible with a free 
industry and free exchange. England, for instance, 
has given up a great variety of taxes which she used 
to impose, and now collects her revenue about as 
follows : — 

Customs, 32 per cent. Stamps, 14 per cent. 

Excise, 30 per cent. Post-office, 6 per cent. 

Taxes, 14 per cent. Miscellaneous, 4 per cent. 

(5). Many of the taxes under our internal revenue 
system are vexatious and burdensome without being 
very productive, and might with advantage be thrown 
off. The taxes on expenditures are of this nature. 
It does not appear to me that the tax on raw cotton 
was a just tax, for the reason that no similar one is 
laid on other agricultural productions. Within a 
short time, both branches of Congress have passed 
a law abolishing the tax ; providing in the same stat- 
ute, that no duty be laid on cotton imported from 
abroad. An important tariff provision is thus incor- 
porated in a law abolishing a tax. Whether the 
indirect taxes should be lessened or abolished, 
ought to be determined by considerations affect- 
ing the people rather than considerations affecting 
special dealers themselves. The people pay ulti- 
mately all these taxes, and pay them too enhanced 
by the profits of all the middle-men through whom 
the goods come to them. This incidence of all 
such taxes on consumers has not been attended 
to as it should be in the framing of our revenue 
system. Congress forget while they listen to dele- 
gations from classes, that the greatest class of all 
never sends special committees to Washington. The 
few are loud in their call for "relief," whenever 



486 ELEMENTS OF POLITICAL ECONOMY. 

profits fall off, but the unvoiced masses suffer on 
under accumulated injustice. The same popular 
consideration should determine all free lists in im- 
ports, and all exemptions in domestic taxation. 
Looking at revenue simply, it would perhaps be best 
to lay a small duty on all imports, except what the 
government itself imports ; but if the duty on any 
article prevents importation, and the consequent ex- 
portation of domestic products in return, it is better 
for the general welfare to throw the duty off alto- 
gether. It is right for the legislator to look at the 
interests of trade as well as at the interests of the 
revenue, but only with a single eye to the general 
good. There is no objection to a free list so soon as 
the principle of protection is abandoned. So of do- 
mestic exemptions. So much money is to be raised 
by taxation. Let it be raised in such a way as shall 
least interfere with what would otherwise be the on- 
going of exchanges in all directions. The principle 
is simple ; the problem is difficult ; but wonderfully 
less so, the moment all attempts are given up to fos- 
ter any branch of industry whatever. To remit a tax 
for the general good is not to foster any particular 
branch of industry. The principle enjoins relatively 
low taxes everywhere, and complete exemptions only 
then when the interests of the masses clearly require 
it, as in a tax on bread, or where a trade would cease 
if under a tax, or where some other prudential con- 
sideration can fairly be shown. Stamps are an un- 
exceptionable mode of raising a revenue, and are be- 
coming very productive in the United States. The 
revenue from this source rose from less than six mill- 
ions in 1864 to over sixteen millions in 1867. There 



OIT TAXATION. 487 

is little doubt that our internal revenue system may 
shortly become so simplified and certain in its opera- 
tions that a vast revenue may be derived with com- 
paratively little grievance to the people. It produced 
in 1867, |266,027,o37 of gross revenue, at an expense 
of a little less than three per cent, for collection. 

(6.) Taxes and duties should be collected by the 
government in as economical a manner as possible, 
that is to say, the money should be kept out of the 
pockets of the people as short a time as possible, 
disbursement following quick upon collection. It is 
poor policy to gather taxes at the beginning of the 
year which will not be disbursed till the end of the 
year. Let the people use their funds till they are 
wanted at the treasury ; and if the taxes do not then 
come in as fast as wanted, it is better to issue what 
are called in England exchequer-bills, and in the 
United States certificates of indebtedness, to be re- 
deemed at the end of the year from the proceeds of 
the taxes, than to let, the people's money lie idle in 
the treasury. 

(7.) If the necessities of the State require it, gov- 
ernment has the right to demand from aU persons 
who are capable of making exchanges, and who do 
make them, something in the form of taxes. But it 
is every way better, when possible, that people of 
very moderate means should be exempted altogether 
from direct taxes ; and the payment of indirect taxes 
is a matter wholly in their own option, since they are 
at liberty to buy much or little of those commodities 
subjected to an indirect tax. In this country at pres- 
ent, incomes not exceeding $1000 are exempted by 
the law. If a house-tax should be levied, all houses 



488 ELEMENTS OF POLITICAL ECONOMY. 

below a certain grade of style and comfort should be 
exempted, and the tax pass up by easy gradations 
from those just taxed to the palatial residences of 
the rich. In the present age of the world, the well-to- 
do citizens of every country are able to bear without 
too great difficulty the burdens of the government ; 
and nothing tests better the degree of civilization 
which a nation has reached than the care and solici- 
tude it displays for the welfare of its poorer citizens. 



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